ON Semiconductor Corporation Stock

Good day, and thank you for standing by. Welcome to the onsemi Third 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 Corporate Development and Investor Relations. Please go ahead.

Thank you, Daniel. Good afternoon, and thank you for joining onsemi's third 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 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 the 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 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, and thank you all for joining us this afternoon. Our third quarter results reflect continued strength in our business and the momentum we are building across our strategic growth markets with growth above seasonal trends, continued acceleration in AI data center and improving demand in industrial. We see particularly strong demand where power density is becoming the key differentiator from AI data centers and the grid infrastructure supporting them to energy storage and next-generation vehicle architectures.

These are strategic markets where we focused our investments and are now seeing that strategy translate into revenue growth, margin expansion, share gains and new customer wins. AI data center continues to be our fastest-growing market, scaling more rapidly than we anticipated entering the year with new wins that started to ramp. In automotive, we continue to gain content and secure new platform wins in every region, while industrial demand continues to improve, led by power infrastructure and energy applications.

In Q3, we delivered $1.72 billion of revenue, non-GAAP gross margin of approximately 41.2% and non-GAAP diluted earnings per share of $0.90, all above the midpoint of our guidance. The combination of stronger demand, improved mix and disciplined execution is driving meaningful operating leverage in our model with earnings growth significantly outpacing revenue growth.

We remain supply limited in certain technology segments of our business, and we made the short-term decision in the third quarter and into the fourth quarter to allocate to markets where we see strong end demand like AI data center, industrial, which came in much stronger than we originally planned. In automotive, we are supporting all deliveries for end demand, but we are not supporting inventory replenishment backlog. As we balance supply and demand, we expect 2027 automotive growth to be in line with our long-term target.

In AI data center, our revenue covers the complete power tree from power supply units or PSUs to low-voltage smart power stages near the processor, where increasing compute is driving greater power density requirements and higher semiconductor content. In the third quarter, our AI data center revenue grew 39% sequentially to $180 million, and we now expect to deliver approximately $620 million of revenue in 2026, an increase of 140% year-over-year.

For 2027, we still expect our AI data center revenue to double over 2026 as we continue to ship with new product ramps. In the third quarter, we began volume shipments into multiple marquee platforms, including Google with both silicon carbide and silicon MOSFETs for PSUs and 54-volt to 12-volt applications. The transition to 800-volt architectures creates the next content opportunity for onsemi, moving AI data center power directly into our strength.

Our comprehensive low-to high-voltage power portfolio spanning silicon, silicon carbide and vertical GaN remains a competitive advantage, allowing us to address direct conversion from 800 volts to the 54-volt, 12-volt and 6-volt rails required across the AI rack. As power systems become more complex, customers increasingly need solutions that go beyond individual components.

At last month's OCP Summit, we showcased our 800-volt to 6-volt solution using our differentiated vertical GaN technology alongside our gate driver and MOSFETs to deliver industry-leading efficiency and world-leading power density for one of the most challenging conversions in the AI rack. The move to 800-volt high-voltage DC also accelerates the transition from mechanical to solid-state power disconnects for fast turn-off from solid-state transformers and circuit breakers to hot-swap applications.

Our silicon carbide JFET portfolio delivers superior thermal performance and is already designed in and contributing to our data center revenue. At Investor Day, we talked about the investments we are making to build differentiated capabilities ahead of the inflection points in our markets, and we continue to do that as power density becomes increasingly critical across AI data center, automotive and industrial. One example is EPP, our embedded power platform introduced at Investor Day.

EPP uses the silicon wafer itself as the package to solve electrical, thermal and mechanical constraints simultaneously. We are pleased with the customer interest in the platform since the announcement, reinforcing our conviction that power density is becoming an increasingly important differentiator across automotive, AI data center and industrial applications. EPP is already sampling to alpha customers across these markets and is manufactured using our 12-inch silicon process at East Fishkill.

Today, we are also excited to announce the acquisition of Ferric, which further extends our capabilities into integrated voltage regulators or IVR and puts us in the leadership position for power delivery to the next-generation AI processors. As power requirements of AI processors continue to increase, IVR incorporates the complete power regulator, including controller, power switches, capacitors and magnetics in one thin package and places it closer to the GPU, reducing power losses and solving the power density problem at the core.

Ferric offers the most compelling IVR solution in the industry with its industry-leading efficiency and transient response performance in an exceptionally compact footprint with best-in-class z-height. We expect Ferric to increase our market share in the Vcore stage of the AI data center power tree. While this is a multiyear opportunity for onsemi well beyond 2030, we are raising our 2030 AI data center revenue target by $500 million to greater than $3 billion.

Moving on to our industrial business. The AI halo effect is driving momentum beyond the data center itself. We expanded hybrid EliteSiC and IGBT module wins with multiple lead customers, including Sungrow and Sineng, driven by the 99.3% efficiency platform we introduced last quarter. Also in our industrial business, we see increasing momentum in robotics and physical AI, an area where our capabilities in power and sensing are highly complementary to Synaptics.

Demand from first-person view or FPV drones is driving increased shipments of our 2-megapixel and 8-megapixel Hyperlux image sensors, and we are engaged with more than 10 leading drone manufacturers. We continue to diversify across the robotics market and have secured multiple new design wins with leading U.S. humanoid makers across power, connectivity and sensing.

For sensing, we are advancing our indirect time-of-flight or iToF technology to deliver world-class depth resolution of 1 millimeter up to 10x better than competing solutions, enabling the precise depth perception critical for robots to interact with the physical world. As physical AI scales, these applications bring together many of our core capabilities across power and sensing, creating a significant new content opportunity for onsemi.

Turning to automotive. We continue to win new customer designs across all regions. As the industry moves toward electrification, higher level of autonomy and software-defined vehicles, the investments we have made in new products continue to expand our content per vehicle up to $2,000 as architectures evolve. These transitions create multiple vectors of content growth for onsemi even in a relatively flat SAAR.

We continue to gain share in the North American EV market across traction inverter designs and new onboard charger platform wins in addition to the Treo-based 10BASE-T1S ramp we already started. Across European OEMs, we expanded our design wins across our power portfolio as they also started the transition to 48-volt zonal.

In China, we continue to expand our leading position in high-end OEMs for their 900-volt electric vehicles with new 1,200-volt silicon carbide traction inverter wins at NIO for their flagship sedan and Geely Zeekr's rapidly expanding export model. As we look ahead, we are increasingly confident in the trajectory of the business. AI data center continues to scale rapidly, while improving demand in automotive and industrial, content gains and new platform wins create multiple vectors of growth.

All these trends are converging around the areas where onsemi is differentiated in intelligent power and sensing and our disciplined execution positions us to translate that growth into stronger earnings and cash generation. I want to thank our employees around the world for their continued focus and execution. Their work is what enables us to deliver for our customers and create shareholder value. Now let me turn it over to Thad to provide more details on our results and guidance for the fourth quarter.

Thanks, Hassane. We believe the recovery is gaining momentum, and we are in a fundamentally stronger position than in prior quarters. We have more content, a broader market opportunity and substantially greater earnings power. With much of the heavy lifting and investments behind us, we are positioned to convert revenue growth into earnings and free cash flow growth. In the third quarter, we continue to see this benefit in our financial results.

Q3 revenue was $1.72 billion, above the midpoint of our guidance and up 7% sequentially. Non-GAAP gross margin expanded by 190 basis points quarter-over-quarter to 41.2% and non-GAAP earnings per share was $0.90, growing 4x faster than revenue growth year-over-year. During our Investor Day, we discussed having consistently invested ahead of major market inflection points, building capabilities organically and supplementing them through strategic M&A to accelerate time to market. AI data center is a clear example.

As architectures evolve, we are continuing to strengthen our capabilities across the power tree to position onsemi to capture more of that opportunity. Today, we announced the acquisition of Ferric for $600 million, plus up to $175 million in earn-outs tied to the achievement of revenue milestones. As Hassane mentioned, Ferric puts us in a leadership position in power delivery for next-generation AI processors. We expect Ferric to be accretive to our growth and gross margin targets with EPS accretion at scale and no meaningful near-term financial impact.

This is a multi-year opportunity, raising our AI data center revenue target by 20% to more than $3 billion in 2030 and continues to accelerate thereafter. We expect the transaction to close in the fourth quarter, subject to customary closing conditions. Additional details on the acquisition are available on our Investor Relations website. Turning to revenue for the third quarter. Q3 revenue was $1.72 billion, up 7% sequentially and 11% year-over-year.

Revenue was $22 million above the midpoint of our guidance with growth in industrial and AI data center. Automotive revenue was $777 million, down 1% sequentially and year-over-year. The sequential decrease is primarily due to the reallocation of supply to the AI data center and industrial end markets. We expect automotive revenue to decrease high single-digit percentage points in the fourth quarter, reflecting continued supply reallocation as well as timing and phasing of customer deliveries.

Q1 is expected to return to normalized levels as supply comes online. Industrial revenue was $467 million, up 10% sequentially and 9% year-over-year. We saw strength in energy infrastructure, factory automation and the broader industrial market. We expect industrial revenue to increase low double-digit percentage points in the fourth quarter. AI data center revenue was $180 million, up 39% sequentially and 175% year-over-year.

Demand continues to accelerate, and we now expect our AI data center revenue to reach approximately $620 million in 2026, increasing mid-teens percentage points in the fourth quarter. In 2027, we expect this to double off a higher base. Please note, beginning this quarter, we are enhancing our disclosures by separately reporting AI data center revenue as a fourth market segment to provide greater transparency into this important growth driver for onsemi.

You will see this in our supplemental materials on our Investor Relations website and in our 10-Q. Revenue for the other end market segment, now excluding AI Data Center, was $299 million, up 11% sequentially and 10% year-over-year due to normal seasonality in the Wireless segment. We expect our other revenue segment to increase high teens percentage points in the fourth quarter.

Looking at the split between business units, revenue for the Power Solutions Group, or PSG, was $890 million, an increase of 7% quarter-over-quarter and 21% year-over-year. Revenue for the Analog and Mixed Signal Group, or AMG, was $597 million, an increase of 9% quarter-over-quarter and 2% year-over-year. Revenue for the Intelligent Sensing Group, or ISG, was $235 million, an increase of 3% quarter-over-quarter and 2% year-over-year.

Moving to gross margin. GAAP gross margin was 41.4%, and non-GAAP gross margin expanded for the fifth consecutive quarter to 41.2% due to utilization improvements earlier in the year and favorable mix to new products. Utilization remained flat at 83%. We expect similar levels in Q4 with utilization increasing as we move into 2027 in response to improving demand signals. Our Fab Right strategy remains an important contributor to the long-term margin opportunity.

In Q3, we closed the previously announced divestiture of a back-end facility in the Philippines, and we remain on track to close our divestiture of the Mountain Top fab exiting 2027. We are operating with a more focused and efficient footprint, creating additional opportunity for gross margin expansion over time. GAAP operating expenses were $335 million. Non-GAAP operating expenses were approximately $310 million. GAAP operating income was $378 million or 22% of revenue.

Non-GAAP operating income was $400 million or 23% of revenue. GAAP net income was $314 million and non-GAAP income was approximately $354 million. Our GAAP tax rate was 21%, and our non-GAAP tax rate was 15%. GAAP share count was approximately 397 million shares, resulting in GAAP earnings per share of $0.79. Non-GAAP share count was approximately 392 million shares, resulting in non-GAAP earnings per share of $0.90.

Turning to the balance sheet. Cash and short-term investments were approximately $4.4 billion at quarter end. Total liquidity was $5.9 billion, including $1.5 billion undrawn on our revolver. Cash from operations was $516 million and free cash flow was $489 million or 28% of revenue. Capital expenditures were $28 million or 1.6% of revenue, and we expect full-year capital expenditure to be approximately 2% of revenue. Inventory increased $22 million sequentially but declined on a days basis by 6 days to 186 days.

Strategic inventory continues to drain, declining 7 days in Q3 and base inventory increased by 1 day as we continue to support higher demand. Distribution weeks of inventory declined to 9.9 weeks from 10.1 weeks in Q2 with sell-through continuing to support a healthy channel and mass market growth. We repurchased $20 million of shares in Q3 with activity limited by trading restrictions related to the Synaptics acquisition and renegotiations.

Looking forward, let me provide 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. We anticipate Q4 revenue will be in the range of $1.715 billion to $1.815 billion, representing above seasonal growth of 2.5% sequentially at the midpoint. We expect non-GAAP gross margin to be between 41.5% and 43.5% and include approximately $8 million in stock-based compensation.

At the midpoint, this represents 130 basis points of sequential expansion. Non-GAAP operating expenses are expected to be between $303 million and $318 million. This includes approximately $34 million in stock-based compensation. We anticipate non-GAAP other income to be approximately $27 million, favorable. We expect our non-GAAP tax rate to remain at 15% and our non-GAAP diluted share count to be approximately 392 million shares.

This results in non-GAAP earnings per share in the range of $0.95 to $1.07, and we expect capital expenditures in the range of $40 million to $50 million. The fourth quarter outlook reflects continued demand momentum and another step forward in our model. Based on our current visibility, we expect this momentum to continue into 2027 with continued revenue growth and gross margin expansion as we scale our differentiated products and realize the benefits of our more efficient operating model.

As we look ahead, the opportunity is about more than a recovery in demand. We have built a stronger business with significantly greater earnings and cash flow potential. Our portfolio is more focused; our manufacturing footprint is more efficient and our path to growth is capital efficient.

As we exit the year, our priorities are clear: execute on the demand in front of us, scale our differentiated platforms and capture the large market opportunities ahead. We believe we are well positioned to deliver sustained growth and expand margins, creating long-term value for our shareholders. With that, I'll turn the call back over to Daniel to open up the call for questions.

[Operator Instructions] Our first question comes from Vivek Arya with Bank of America Securities.

Hassane, you have been sort of, I guess, rightly deemphasizing automotive in Q2 and Q3, and I think even in Q4 with this signaling of, I think, high single digit from what I heard. But then you suggested that next year, auto would go back to growing per your long-term target, which I think is up whatever, 9% or 10%. So I'm curious, does underserving that market have any market share implications longer term? And then where does the extra supply come from to start regrowing in that market from next year?

Yes. So just one thing I want to correct the words you used. We're not deemphasizing the automotive market. Automotive remains strategic as an end market. And even in our 5-year outlook that we highlighted in Investor Day, automotive still is the largest market, and that's not going to change. What you're seeing today or this quarter and next quarter, what we've hinted at is short term in nature and it's supply-driven, not strategically driven.

What I mean by that is we're not losing share because we're working closely with the OEMs, as I mentioned in my prepared remarks, we are supporting all of their end demand needs. What we are holding back, again, with conversations with them and alignment with them is their replenishment that they would have liked to see this -- during the quarters. We will resume shipment in Q1 as the supply comes online. The supply -- we've always had the supply coming online or increasing supplies in the technologies we've been constrained on.

But you saw the results from industrial and AI data center even beat our guidance and our expectations. So in the short term, we decided to shift the mix a little bit, but that is not a strategic decision. Our strategy remains the same as we've highlighted at Investor Day. That's why we're reiterating 2027 resuming the growth, which tells you there's no share loss. It is purely a replenishment, not an end demand, and it's short term in nature.

Got it. And for my follow-up, maybe, Thad, if you could walk us through the puts and takes of gross margins Q3 to Q4 volume mix utilization. And then let's say, conceptually next year, if your auto industrial businesses grow according to the long-term growth rates you set out and data center can potentially double. How should we think about the potential for gross margin expansion for 2027?

Yes, Vivek, our gross margin bridge doesn't change, right? It's -- the biggest driver in the gross margin expansion here in Q4 is utilization improvement. Now keep in mind, this is utilization improvement from 2 quarters ago, right? So you'll start to see that. You also start to see a little bit of the pricing impact that we've had where we've already had the headwind on the input costs hitting us, and so we'll start to see some of that pricing impact coming in as well.

But the math of every point of utilization being 25 basis points to 30 basis points of gross margin improvement still holds. And that will be true as we go into 2027 as well. So as I mentioned in my prepared remarks, we expect further growth. We expect further utilization improvement as we go into '27, which then will continue to give us margin expansion throughout the year. Obviously, as we have revenue growth, that will help as well. And then the other piece that really starts to drive is the new products.

So we get favorable mix, and we're already seeing that here in Q3 as the new products start to ramp at favorable margins. So we'll start to see that as a nice tailwind going in there, too. And then there's a little bit of the Fab Right with one of the divestitures that we've announced on the back-end facility. We'll see a little bit of that in '27. We'll see more of it in '28 from the Mountain Top facility, but that's a nice tailwind as we go forward as well.

Our next question comes from Blayne Curtis with Jefferies.

I just wanted to follow up on the last one. So I'm assuming auto would have been up in December and it's down high single digits. So I'm just trying to understand the level of restocking that might have already happened in the December quarter. And I'm just kind of curious whether you see those trends increasing.

Yes. I mean the trend is increasing. So there will be like -- think about it as there will be a catch-up because it's restocking, it's not really the end demand. The end demand, we are supporting. So there's no change to that. So you can assume some seasonality on top of it. But from a replenishment, the demand is not perishable. So we will -- you'll see that resuming in the first quarter as supply comes online. So it's purely a -- you can think about it as a quarterly timing.

We're not guiding Q1. But once we get to Q1, you can see that some of it would have been in Q4 if you normalize it. I've always said in automotive or even in multiple markets that we service, I don't look at the quarter-on-quarter, and I don't read anything into it. I look at it from a trend perspective and the decisions we are making. So I'm not -- I have 0 concerns about the decisions we're making in automotive.

They are the right decision for us to make as a company for -- to service the increased demand that we've delivered in industrial and AI data center in Q3 and looking out in Q4. And then we will resume to normalized supply and demand starting here in '27. And for the rest of '27, you'll see us deliver the long-term target again.

And then data center business doubling again in '27 is pretty impressive. Just wondering if you had any broad strokes you could walk through in terms of the drivers of that.

Yes. I mean, look, it's a lot of the broad strokes as far as across the power tree, which I've been saying for a few quarters that we've been doing design wins across the power tree from the high voltage all the way to the core. Those have started to come online and generate revenue. So we've already transitioned from design-in to design wins and now revenue. And then the breadth of customers, we've highlighted some customers in the past. Some customers, you can kind of draw a line to who they are.

And it's across the power tree, meaning directly with the compute vendors when we're sitting on the board, but also with the supply chain when it comes from PSUs and so on, and we've highlighted those throughout the last few calls. All of these are starting to get maturity. We're ramping up -- we ramped up a few more in the third quarter here. We hinted at it at Investor Day as well.

So that came in. So it's really execution, execution, execution, but more importantly, new products that we have been introducing over the last couple of years are starting now to deliver. And that ramp is what's going to continue in 2027 on top of the new stuff that we're going to ramp into revenue in '27 that we're doing design wins on now. And just to highlight, the doubling in '27, again, is off of the higher base that we just talked about today. So it's -- '27 is higher than what we expected even 90 days ago.

Our next question comes from Joe Quatrochi with Wells Fargo.

Maybe just to follow up on that. The $500 million that you're increasing for your 2030 revenue target, is that all from the acquisition? Or is that also from just the base increasing from 90 days ago?

This is tied to the acquisition.

Okay. And then as a follow-up, as we think about just the cash outlay that's kind of in front of you in terms of this acquisition and then also Synaptics and you're raising some debt for that as well. But how do we think about just the use of free cash flow and capital returns in that vein?

Yes, Joe. So we'll be using cash off the balance sheet from the Ferric acquisition. As we close the Synaptics acquisition, we will be focused on delevering. That will be our top priority. That's obviously after investing in the business as well. But we'll focus there, and we'll be opportunistic on buying back shares over time. But the intent here is to delever quickly.

Our next question comes from Tom O'Malley with Barclays.

My first is on industrial. It looks like it's well above seasonal in September. And then when you go into December, it looks like some very strong results again. Any sort of vertical that you would call out in industrial that's doing a bit better? Those are some impressive numbers in the back half. Just want to start there.

Yes. I think I would call out the AI halo that we talk about, anything from energy. Think about it from the grid to the AI data center. So everything outside the walls of the AI data center has been very strong. It came in better than we expected. A little bit on the PMIs are improving, so the broad industrial. But if you ask me what is the beat and the outlook tied to is really the AI halo that we highlighted at our Investor Day is coming in as we expected and in the short term higher, which is the reason I mentioned servicing that ahead of some other markets.

Yes. And the broader industrial is about 40% of the total industrial bucket, and we're seeing strength there as well. I think just as you're seeing PMIs improve.

Got you. And then Thad, second one for you is just you talked about the automotive revenue just being a bit lighter because of supply relocation, timing, phasing of customer deliveries. But it looks like the utilization is flat. So are you short external components? Because I would expect if you're not able to get more supply, like the utilization would continue to move up. You're saying kind of that's more next year. Maybe just describe the dynamic, like where are you seeing the constraints?

Yes. Keep in mind that what you're seeing come out of the line today was utilization from 2 quarters ago when we were running at 77%. We ran at 83% last quarter. We're running at 83% going into Q4. So this is us catching up to that supply as you get cycle time through the fab in the back end.

So that's where we have supply coming online. The supply constraints are in specific lines in certain areas. So it's not across the board or obviously, we'd be taking utilization up further. But as we look into next year and we see demand continuing to strengthen across all the end markets, we will be taking utilization up.

Our next question comes from Gary Mobley with StoneX.

Gaurav Saini here on behalf of Gary Mobley at StoneX. So I just wanted to ask specifically about the utilization lever in the gross margin bridge. About half of the path to that 53% gross margin target you guys set out comes from utilization. So just given the restructuring and also the changes to depreciation, how should we sort of think about the incremental gross margin on each dollar of revenue from here on out?

Well, look, the way you should think about the Q3 results is there's about 450 basis points of underutilization charges. Now again, you got to go back to the Q1 utilization of 77% for that. So if you take that, getting up to what is kind of peaking out for us, 92%, 93% somewhere in there, you can do that math on that 25 basis points to 30 basis points and you get to that 450 basis points. So to do the walk for everybody, getting from here to the 53%, you've got about 450 basis points of utilization improvement.

You've got 225 basis points of Fab Right. I talked about the activities we're taking there. You've got another 400 basis points of mix and the new products kicking in, and I've already kind of talked about we're starting to see that hit the P&L, and we'll start to see a lot more of it next year. And then the last component is we've been raising pricing, but we haven't seen that necessarily fully hit the P&L. So there's a little bit of tailwind from there. So if you start to add all that up, you're getting right around that 53% long-term target.

Got it. Okay. And you guys also talked a bit about just now the new product ramp in '27. I kind of wanted to double-click on that and the contribution we'll see in the fiscal year for next year. How should we sort of think about the revenue from vertical GaN, EPP and Treo as these new sort of layers of revenue that really didn't preexist before?

Yes. So what you're going to start seeing is obviously, Treo will continue to ramp. Treo is already contributing to revenue this year. We already talked about vertical GaN contributing revenue in '27. And then you layer on top of that towards the end, EPP. But those are -- other than Treo that started to ramp last year. And obviously, we've been more than 2x as you kind of move forward from a smaller base.

The other ones will start to ramp and will follow such a trajectory. So you can think about the base for 2027 as new products that we've had in '25 and '26 that will start contributing meaningfully, while the new products, we've introduced like EPP and vertical GaN to start in '27 and continue forward, all leading up to a more mature mix of new products towards that 2030-time line depending on auto or industrial.

Our next question comes from Chris Caso with Wolfe Research.

The first question is with regard to the Ferric acquisition. Can you talk to us a little bit about where that acquisition stands with regard to revenue and design wins and realizing you used that to take up your 2030 target. But as we look into sort of '27, '28, what can we expect from that business?

No. Look, I'm not going to give a guide to revenue as far as the acquisition or '27 at this point. But I will tell you, during the diligence that we've had, obviously, we all know from a market, ourselves and all of you know the trajectory that IVR has taken that it is the solution for higher and higher power of AI processing. That's point number one. We know integration, power density and the criticality of the z-height is important.

And Ferric has been engaged with all of the hyperscalers from a design and platform architecture perspective. That's from the technology and the capabilities that they bring. We bring the scale, manufacturability and, of course, the breadth of our reach within the hyperscalers, but also the compute platforms.

That's the combination that makes this strategic. But from an engagement perspective, they are engaged and in a very good position with all of the hyperscalers based on our touch point on the diligence that we've done with the team. And of course, it brings in a high-caliber, talented team that complements our own internal efforts, and that's the win-win.

Got it. As a follow-up, I've got a question on CapEx and capacity as you go into next year. And correct me if I'm wrong on this one, but it sounds like some of the supply constraints you're facing now is just a function of not having started the wafers earlier in the year. And so now you're catching up.

So I guess if that's the case, where do you stand with regard to capacity as you go into next year? Do you think you have the capacity to be able to meet what you see for the market next year? And then from that, what sort of CapEx should we be expecting as you head into next year?

Yes, Chris, I think that's a fair characteristic, that this is a catch-up, right? And that's why Hassane talked about this as being temporary. We'll catch up in Q1. So we do have the capacity that we need based on the outlook that we have today and even some upside to that outlook. So I don't think we're going to be anywhere near capping out our capacity as we go into 2027. This year, our CapEx intensity is about 2% of revenue.

I expect it to be about 5%, in line with our long-term model next year. That will give us the ability to bring in not only maintenance capital, but a little bit of capacity where we need it on certain lines where we can get higher throughput. But we believe we're in a really good spot for a market that's going to grow in 2027 and even beyond that in terms of just the capacity we have online.

Yes. And the capacity that we talk about that will contribute to catching up in Q1, you can think about this as the capacity was -- is already behind us and the investment is behind us. It will just come online and deliver in -- think about it in 2027. So it's not something that we're looking forward. It's something that we've done, and we're just going to get the benefit just from the latency perspective.

Our next question comes from Jim Schneider with Goldman Sachs.

Hassane, I was wondering if you could maybe characterize the OEM customers' behavior in terms of their willingness or interest in restocking. I think you referred in your prepared comments to automotive customers are not supporting restocking but only supporting increases in end demand. Can you maybe sort of broadly describe what's happening with those customers and then the broader OEM customer set with respect to taking on more inventory in the balance sheet?

Yes. So I'll -- first, I'll characterize it as specific to OEMs. It's not all OEMs are behaving the same way. So I can only reference the ones that we've been engaging with that have demand. And they're looking at it as they see the writing on the wall. AI and industrial is recovering, and they're trying to place demand, so they're not caught in traffic as far as capacity and capacity constraint because they see it across the board, not just on power semis that we see, but across analog, compute and of course, the memory.

So they're looking at their 2027 plans, and they want to think about it as have a what I would call a business continuity plan or BCP as known in the industry. Those are strategic plans that we do with our strategic OEMs where we sit down and figure out kind of their capacity and their pull rate, and we build ahead of that. Normal standard procedure as far as replenishment ahead of the ramp.

That's why we're having these conversations as far as we're not going to build it all in Q3 and Q4, which we made that decision. We will continue to ship demand, knowing that the backlog is now on the books and we'll service that, and that's what we've built the new capacity model towards. That's why it's a temporary in nature, it's short term, and we'll catch up in the '27.

And then maybe just as a follow-up, your remaining other subcategory seems to be actually growing very, very well even when you take away the data center, re-bucket it into its own category. Can you maybe talk about some of the -- what's driving the other category that remains? And what -- can you kind of extend that growth rate into 2027 or why or why not?

Yes. The other bucket for us, we play opportunistically, right? In the prepared remarks, we talked about Q3 as being seasonal with the wireless end market that's in that bucket as well. When we look into Q4, we have a large customer ramping program. So it's a little lumpy. I think that's why Q4 is up to mid- to high teens. As we go into next year, no, I wouldn't expect it to grow at that.

I think you're going to see the AI data center and the automotive and industrial grow at a much faster rate and that to be a little bit more in line with normal historical rates there as we focus on the other markets. And by the way, the Q4 ramp that I'm talking about is manufactured externally. So you're not seeing an impact of that. That's why we're able to support that.

[Operator Instructions] Our next question comes from Tristan Gerra with Baird.

This is Tyler Bomba in on for Tristan. Is there any inventory replenishment embedded in the strength in industrial? You talked about not allowing replenishment in auto, but curious what you're seeing in industrial.

No. So the strength in industrial is really coming from the AI halo, as I mentioned in a prior answer. And the AI halo, we see end product going out in the market. So we can see the sell-through, not just the sell-through from us to customer, but the sell-through from customers to their end customers. If you look at the large industrial names that do kind of grid to data center, they have all had really good quarters for the ones that announced so far.

And we see that as well as far as what they're building. So that's why we're allocating when I say it's going to truly end demand, which is stuff getting deployed on sites. So that's not an inventory replenishment. It is purely an increase in demand that is getting installed as fast as possible in end sites.

Great. For my follow-up, how should we think about the geographic mix of silicon carbide growth in '27 and the underlying contribution from new platforms and content gains versus just a recovery in the underlying EV production?

I think it's very broad in nature. Of course, from an EV perspective, China remains a strong pull for silicon carbide. But also a big growth in new products on silicon carbide is coming from North America with AI data centers. And of course, JFET specifically that I called out in my prepared remarks, that primarily is going into AI data center. So I would say since the EV diversification we've had geographically and end customer, we are adding now a very broad AI diversified market for silicon carbide, both by application, customer and geography.

Our next question comes from Tore Svanberg with Stifel.

Yes. Hassane, I wanted to go back to what you mentioned about the business continuity plans. I mean we all know that the capacity, especially for AI data centers has been tight for a while, right? So I'm just curious what's driving the auto OEMs to be willing to restock right now? And it must be a sign that their demand is really starting to accelerate? Or do I get that wrong?

No. I mean I don't know about accelerate, but I think there is demand that they are working on. Remember, for us, it's not just the SAAR, it's the content. So as you heard in my prepared remarks, Europe is moving into the 48-volt and zonal, that creates a higher demand opportunity from a content perspective, not necessarily vehicle units. Mix of EVs is higher, which is more content.

So you can think about it, demand that I refer to from our side is content. So when we talk about resuming to our long-term model, which is high single digit over SAAR, that's the one I'm referring to. That's what the OEMs place orders for. It's -- they see their content growth in their new platforms that they are introducing, not necessarily a SAAR or unit. So that's what I want to be very clear. Inventory for us is content in the car.

Yes. That's very helpful. And as my follow-up on Ferric, so I think there's a lot of companies positioning in IVR right now. And I was just hoping you could share with us a little bit what's the uniqueness that Ferric brings? I know in your presentation, you talked about better magnetics, smaller footprint and so on and so forth. But yes, anything else that you could share with us why their technology is sort of the winning formula versus what we've seen from other companies?

Yes. So if you think about what the solution -- what the end solution needs in order for it to be viable from an IVR perspective, there's a thermal, a mechanical and an electrical. From an electrical perspective, we know Ferric has a superior transient performance than anything else in the market. So that covers the electrical. That's important because of the dynamic load that high-end processors are driving, where you got a lot of transient and the voltages have to regulate or respond to it.

So that provides a superior electrical performance versus peers or competitors. Then you have the mechanical side of it, which is the power density, where there are other solutions that are not necessarily magnetic. There are other innovative solutions out there, but the solution from Ferric with electro and magnetic components of it with the controller, that gives you the most dense from an area and the most compact from a z-height. The -- you can think about everybody's z-height is in the 2.5 millimeter.

Ferric blows that away. So that is extremely important when you're talking about truly integrated or IVR specifically, not outside of the package and so on. So that's key. And then the last one is the thermal. With the efficiency that the first 2 provide, the thermal becomes a lesser of a problem to resolve with the GPU or the compute vendors. Those 3 components, the Venn diagram, if you put all of them together, Ferric is the one in the middle. That's why we like it. That's why we wanted that asset rather than comparing to everything else.

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 your questions. We are focused on the areas where the challenges are getting harder and where our differentiation matters most. Power density is becoming critical across AI data center, automotive and industrial, and our investments in high-voltage technologies, Treo-based solutions and EPP enable us to solve those challenges at the device, platform and system level. Combined with the leverage in our operating model, we believe that positions us to drive profitable growth, stronger cash generation and long-term shareholder value. Thank you for joining us today.

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

We would like to draw your attention to the screen for the safe harbor statement and today's agenda.

[Presentation]

Ladies and gentlemen, please welcome on stage President and CEO of onsemi, Mr. Hassane El-Khoury.

It is the era of AI. But just like any foundational technology, it's hitting already a physical limitation because foundational technology, it's not an invention. It's really not a product. It is a layer upon which all industries after are going to be built. And the problem we have is we've reached that limit. The good thing, though, companies are using technology to break through that limit. You're going to see a new onsemi that is foundationally different in order to break through those limitations and through that breakthrough, create the opportunity that we will also be talking about today.

Because it is not unexpected -- reaching this physical limitation has always happened throughout our civilization that the further you go with the capabilities of that layer, the faster those limitations start to occur. We've seen it all the way back to the first foundational technology as simple as what we consider now the steam engine. It really didn't unlock that capability until we figured out how to do machining to make those cylinders. The computing didn't really unlock the capability of that foundational technology until decades later with the transistor design.

And today, with the era of AI, those technologies are compute, memory, and power. And those are the breakthroughs that we have to have in order to really unlock AI into the potential that it is meant to be. And we've seen those limitations. We've seen the first limitation with compute. We've lived through it, and we've unlocked it with advancements in technology and capacity. And we've also seen it with memory. We're actually -- I would argue we're living through it with memory with advancements that are going to break through.

But neither of these are at the physical layer where power sits. And that is the breakthrough that we have to unlock in order for the deployment to not just be contained to a building, but really proliferate into the foundational technology that AI is going to enable across all of our end markets. Because more power is really not enough. We need better power. And we need different power than yesterday where loads were deterministic. It was okay not to be efficient. We had enough of it because the loads were not as intense.

But that challenge has changed where power is always at a max. It's always on, always at peak, and it has to be perfect and it has to be distributed, not only centralized. And that is where we come in. We solve power. We solve the power of yesterday, and we are going to solve the power of tomorrow, which is the power density equation that we're going to be talking about. Because as we look at what systems are requiring, all requirements are going in opposite directions, and they're not converging.

Customers want higher voltage inputs, lower voltage outputs, smaller areas, cooler areas. And, of course, cost is always a challenge in order to bring deployment. And these requirements pull the solutions further apart, and it's getting worse. It's getting harder. We all know whether it's data center, automotive, going from 400 to 800 and above. Automotive has already broken through the 800 into 900 volts. The grid needs to upgrade. And if any of you cover or invest in grid, you know how quick that happens.

And that's going to be pushing that boundary and pulling those requirements for what a capable solution needs to cover. And, for that, you need a different approach. It is no longer an approach of just technology. We have to change the solution that we provide -- and because of that, we had to become a different company in order to deliver on that power density to unlock the value that the new era brings.

But we've built that company on a strong foundation of technologies that we have had. And, over the last 6 years, we have continued through investments, through capital deployment, and through accelerating what is possible into the company we've become today with a very broad set of capabilities that have delivered the onsemi portfolio of power, sense, and control across all of our end markets -- and we will continue expanding those capabilities and that portfolio with the connected compute as we've announced already because for every investments and every breakthrough we've had has been very deterministic ahead of an inflection point, whether it was automotive with electrification, the first wave of upgrades of energy infrastructure, all the way into the future of what we expect the physical AI to be, which is starting to happen today around us in industrial with robotics, and I would argue already in automotive with the autonomous vehicle and autonomous driving.

And that capability and that company we have built is here to address a growing market across all of this secular growth from automotive to AI data center and industrial and the AI overlay on top of it driving that growth and that content starting with the AI halo in industrial, all the way to an over $200 billion market that we, as a company, are addressing with the innovative solutions that you'll hear about today. But more importantly, all of these markets, no matter what drivers are driving them from a content perspective are converging on one clear outcome, which is more than half is centered around power and is centered around better power.

But, to solve the power, it is not a new product. It is not a new technology. It is not a new system. It is a layering effect of a value stack that has to work across top to bottom to deliver on that power density with the efficiency that is required to scale, starting with the foundation of technology into a deployment of products that extract the capabilities of these technologies and together create these solutions that are going to solve these customer problems and deliver the systems with the value and scale that will solve those generational problems. And, with that combination of technologies all the way up and down, systems impacting products, products defining systems is how we will change the power system paradigm.

And taking those requirements that are pulling apart and creating very focused specific platforms, technologies, and products from devices to the intelligence required to the interface and the integration that is going to unlock the value of these technologies, products, solutions all the way to systems. And that's how we will make those requirements that are historically pulling apart converge into a center solution where onsemi plays and onsemi creates and extracts that value. From high voltage to the intelligence with Treo to EPP, Embedded Power Platform, which I will introduce today.

Starting with high voltage, our broad portfolio covers all of the constraints, but also all of the solutions and the required technologies that customers look for from an unconstraint with silicon power to optimizing for high voltage, optimizing for efficiency, and optimizing now for density. And we are the only company that is able to optimize across the complete high-voltage stack and deliver sustainable and competitive solutions for our customers to solve the most complex power density problems. And the latest high-voltage introduction and breakthrough in a series of breakthrough in high voltage is on the vertical GaN, which we have been able to develop, sample, and manufacture and already put in the hands of customers on their boards to solve from automotive to industrial and AI data centers.

And the intelligence comes from our Treo platform. Again, talking about platform as a foundation to any product that goes on top of it with the innovation that is required across voltages and across deployment with a modular architecture that allows us to very quickly introduce the solutions that are required across all of our end markets, across all of the applications and the secular growth that we have seen. But on top of high voltage and the intelligence, we cannot forget the integration because all of the benefit of technology is lost if we are not able to extract what that potential would be.

[Presentation]

Redefining what is possible is what we've done. The high voltage intelligence with Treo and embed those products in a wafer, solving not only the density or the mechanical constraint, but at the same time, being able to deliver on the thermal benefit that is otherwise going the opposite direction, pulling the density and the mechanical constraint apart.

And we've delivered it. You'll see it in our demo showroom across all end markets we service. And that technology -- and we know power and we know packaging because we're leaders in both. And I'm here to tell you we've solved high power already. We've solved it with surface area. That's how we cool. Other technologies, state-of-the-art technologies have tried to solve the density problem, and they failed with the thermal. EPP is the only platform today that not only obsoletes the best-in-class, but delivers on the promise of a true power density that does not use mechanical and thermal as trade-offs for electrical.

And this is not some faraway concept we have. We have been able to deliver within 5 days or less a customer platform that customers can take and simulate their power domain for their cooling and their thermal concepts. And then quickly using our standard 12-inch manufacturing, a sample, electrical, thermal, and mechanical, in this case, an inverter across automotive, across AI data centers, and across the industrial markets and puts us in a class of companies that is from technology all the way through delivery in a unique and competitive position where we are able to use the high voltage, the intelligence all the way to the integration to be uniquely positioned to deliver those solutions to the customer.

Because as the requirements pull apart, we have been able to make them converge not with a product, not with a one-off solution, but with a platform spreading across devices, intelligence, and integration with advanced packaging to solve those high intensity power density problems across all of our end markets.

[Presentation]

Good afternoon. Good to see everyone here. I'm Achyut Shah, and I'm the President of onsemi's Power Solutions Group. I've been at onsemi just over 4 months now, and I'm very excited with the opportunity we have to continue to help AI scale. I've been part of this AI and data center market for over 10 years, first at Maxim Integrated and more recently at Marvell. And I've seen the tremendous value a company can create when the needs of the AI market converge with the capability that a company has developed. And that is exactly the opportunity we have today in front of us at onsemi.

Now, you all have seen multiple chip companies create value in compute, in connectivity, in memory by solving the bottlenecks of AI to help it scale. But, as we look forward, the bottleneck is no longer just in a single chip or a single technology or a single capability. The bottleneck moves to power and, more specifically, the entire power domain from grid to site to core. The reason this becomes a challenge is the sheer amount of power required to scale the compute for AI. The processors grow from hundreds of watts to kilowatts. The amount of power in racks needs to go from tens of kilowatts to megawatts.

And, when you look at this increase in the power at the rack level and multiplied by the number of data centers that need to be built, you now see that there are hundreds of gigawatts of power that need to be developed. And the architecture of old simply cannot deliver that. It simply cannot scale. You need to upgrade the entire architecture for the power tree. And the fundamental challenge, as Goldman Sachs put it very well, is power density. How do you fit the power of 1,000 homes in 1 small cabinet? The enabling factor for the power architecture of the future is going to be power density and the company that can enable this power density, enable this architecture of the future, is going to be the 1 to capture and generate tremendous value.

Before we look at what this new architecture is and what opportunities it's going to create, let's take a step back. What is power density? What is the value of power density? This power density is fundamentally what's going to help redefine the economics of compute, the economics of AI. Power density is not just taking the amount of power you need and closing it into a smaller space. You also have to do that very efficiently. You also have to take into effect the cooling and the thermals behind that solution.

So the space, the efficiency, the cooling, they're all different facets of the same power density challenge. And, if you give your customers a highly power-dense solution, a solution that solves this power density problem, they can use it in multiple ways to optimize their systems. They could use the same amount of power in less space. They get to build less data centers, solving a space problem. You can take the same amount of space and deliver a lot more power in that space. Now, we have a lot more tokens per unit area, a lot more tokens per dollar, a lot more tokens per CapEx that you've generated. And all the while, you can run all of these solutions at a lower temperature, you can run them cooler.

Now, we are using less natural resources like water. So not only is power density important to improve the Total Cost of Ownership for our customers, it also helps them use less natural resources like land and water. This is why this is the fundamental challenge, the foundational challenge that needs to be solved to enable the architecture of tomorrow. If you look at the architecture that we have today, where the processors, XPUs, GPUs are hundreds of watts going to a kilowatt, what we see is the power distribution and conversion is primarily AC, all the way from the grid to the site and all the way to the compute rack. Within the compute rack, you have a couple of conversions at lower voltage. And finally, at the core itself, the point of load, you have what we call lateral power, where power is sitting side by side in a larger area.

But as the power in these processors grows, it doubles and then doubles again in the following generation, the architecture of old no longer scales. We now need to move to what we call the HVDC, the high-voltage DC architecture, where DC is transmitted all the way from the grid to the site as close as possible to the compute. You have a lower number of conversions directly from high voltage to the compute and the compute power itself, the point of load instead of sitting next to the GPUs and XPUs, now sits underneath it, again, creating a power density challenge. And the opportunity here is not just everything in this forward power tree, but you also have solutions like fault management, energy storage systems, uninterruptible power supplies, all of them sitting on this low-voltage AC system today that all need to be converted to high voltage.

Now, as you see the extent of the change that is needed, clearly, all of this doesn't happen overnight. You can be doing this in a step function. It happens in a phased manner over time and different customers will deploy this at different points of time over the next few years. So if you look at what the major steps are going to be in this transformation, you start looking at the rack of today. You have AC coming into the compute rack, a power PSU at the top, a few tens of kilowatts, using low-voltage semiconductors like silicon.

The first step, as these racks need to now go to 30-, 40-kilowatt racks, is the PSU itself starts using high-voltage semiconductors like silicon carbide, increasing the HV content as it can make these AC to next power level conversion a lot more efficiently. The next big change we see is when high-voltage DC 800 volts now, 1,500 volts at some point in the future, comes directly to the power rack. And 2 things happen here. The distribution of power in the compute rack as the busbar goes from 54 volts to 800 volts because as the level of energy goes up, as the level of power goes up, a low-voltage busbar will need so much copper and you will lose so much in energy and heat, it's not feasible anymore.

So first, you got to upgrade the busbar to a higher voltage. And with a busbar at high voltage, the power on the compute trays itself right next to the processor is now high voltage. And the first conversion step on the compute tray goes from low voltage to a high-voltage conversion step. This is what we call as a sidecar architecture that's going to be deployed in the next 12 to 18 months. Now looking out another couple of years, the entire distribution from the grid to the site to the rack goes from AC to high-voltage DC.

And so, now, we essentially have a one line of high voltage with new content like solid-state transformers going all the way from the grid to the rack with less number of conversions down to the core. And if we take all of this new content that needs to be created at the core and all the high-voltage distribution and conversion and you think about normalizing at the rack level, the amount of content growth that drives for onsemi goes from about $15,000 a rack to over $115,000, about an 8x increase in content. And this is what's going to drive the revenue growth at onsemi at a fundamental level. And when you look at this growth that's created, it actually helps growth in 2 different end markets for us.

Everything that's inside the building of the data center or even when hyperscalers put ESS technologies or SSTs right at the site of the data center, we consider all of that to be part of our AI data center segment of revenue. And as AI continues to scale, this will see tremendous growth over the next few years. But when the utility sites and the power grids also upgrade their infrastructure to go to solid state and use high-voltage ESS, that part drives the growth in the industrial part of our business. So, we essentially see an AI halo that also helps further drive the growth and increase the growth potential in the industrial portion of our business.

Now, when you look at this new architecture end-to-end, there are 2 things that become very clear. The first, look at the amount of high-voltage content there is across this entire grid to site to core. You have power conversion, power distribution, power storage, UPS, high-voltage content all the way to the core with the intelligence and the control that goes with it. Now, this high-voltage technology is exactly what we have developed, is exactly where we are leaders in, in the automotive and industrial space. So, it's the same technology base. It's the same research R&D. It's the same platform that we have developed that has made us a leader in industrial and automotive that is now coming into the world of AI that will help make us the leader there, too.

This is exactly what I meant when I said that the needs of the AI market are moving to our playing field. The other part that you see here is it's 1 end-to-end connected systems. There's less conversions. It's not AC going to DC, going to AC. It's all 1 high-voltage system directly going to the compute rack and to the core. This is why our customers talk about this as one end-to-end interconnected system that needs extreme co-design because any issue, any fault, any transient at one end of the system, you can see how it would directly translate and move to the other end of the system uniformly. So, only companies that have the capabilities to serve every single piece of this power tree can help our customers design these end-to-end systems.

And when you look at it, for all the capabilities required, all the technologies required, all the investment required for intelligence, for control, for high voltage, multiple high-voltage technologies, low-voltage technologies, core and control, how many companies actually have the scale and the capability to be able to invest and to be able to design leading-edge solutions across this entire power tree? If you look on the low-voltage side, on the core side, this is where you have the most number of competitors. Now, there's 10, 15 competitors with press releases out there talking about having a core solution. But when you talk to our customers, there's probably 5 or 6 that actually have the technology, the engineering ability and the scale to be able to deliver these solutions to them in the manner that they require.

Now, when you build on to that, what's needed in the middle part of this power tree, the high-voltage requirements of silicon carbide or GaN -- you can see that the competitor list shrinks considerably. Now, there's just a handful, 3 or 4 competitors that have the ability and the scale to be able to deliver these solutions. When you now look at the grid side with further high voltage and energy storage solutions, and now you need fault management all the way across from the core all the way to the grid using technologies like silicon carbide JFETs, you're really left with just 2 companies onsemi and one more that have the capability to participate across this entire power tree from grid to core. This breadth of technology is no longer a nice-to-have. This is a must-have to participate and compete in this market. And at onsemi, we are not just in this to participate. We are in this to actually win at every single point in this power architecture.

And the way you do that, the way you win is you have the breadth of technologies, you have the best-in-class technologies at every point in the breadth, but then you also deliver breakthrough innovations for our customers to solve the fundamental challenges they have to enable AI to scale, the fundamental challenge of power density. And Hassane shared with you a couple of these innovations that we have made, high-voltage GaN, vertical GaN, and EPP. Vertical GaN has the unique characteristics of high voltage as well as high-frequency switching with very high efficiency. And EPP, it's not a product. It's a platform that applies for a solution at every single point in this power architecture, helping improve the power density that our customers want. And I'm going to walk you through a few examples of where we are working very closely and have already delivered some of these solutions in the hands of our customer.

Let's first start with the high-voltage conversion, the 800-volt to 6-volt or 12-volt conversion right at the rack in the compute rack. Using our unique vGaN technologies and using the magnetics expertise we have, we've created our own system that provides 20% better efficiency to 20% lower size than the nearest competitors that we have. And if you think of providing 20% lower size in the compute rack in the most precious real estate in the data center, you're essentially allowing more compute per rack and a lot lower cost per token or a lot more tokens that our customers can deliver per hour from that investment that they've already made. Another place that we help using our unique technology is on the circuit breaker side because as you look at this entire high-voltage system, fault protection and safety becomes an absolute requirement going forward. So, the mechanical systems and circuit breakers of yesterday no longer scale.

You now need to move this fundamental solution into a solid-state technology with the introduction of a solid-state circuit breaker. But, you don't just have one circuit breaker in the system. You have multiple solid-state circuit breakers at multiple points in the system, which uses precious real estate, which is why power density, again, is the fundamental problem to solve, the fundamental challenge to solve to enable this new high-voltage DC architecture. And so, what onsemi has done using our leading silicon carbide JFETs and embedding them in this EPP platform, we have come out with a solution that for the same functionality is 50% smaller than our nearest competitor.

Now, when you make a solution that small, the logical question to ask is, yes, but what happens about the thermals? How hard is that thing going to run? So, not only have we solved the space problem using the unique characteristics of EPP, we have also made the solution, which is 50% smaller, we made it run 20% cooler. Now, if you have a solution that's 50% smaller and 20% cooler, and that's not a breakthrough, I don't know what is. The combination of both of these capabilities, we fundamentally deliver significantly better Total Cost of Ownership for our end customers.

The last part example that I would like to walk through is the Vcore. Now, this is a place that we came a little later to the market, but we have solutions that have caught up, and we have a best-in-class power density solution that our customers are using today with -- on the lateral Vcore side. But, as you look forward, where we are investing going forward is taking the EPP technology and using it to provide the best-in-class height of the next-generation Vcore solution as it goes into vertical power.

So, you take the SPS, embed it within the EPP solution. And now, within the same XY dimensions that the customers want, we now have a much thinner solution than our competitors and the cooling runs a lot better. You have a lot better airflow across the XPUs, the GPUs, and the TPUs, providing significant benefit to our customers. And this is not -- and Vcore is not something that we will only win in the future with the EPP-based vertical power solution. In fact, I'm very happy to announce that we won a major Vcore socket this year with revenue starting by the end of 2026 already in this market.

So, when you look at the fundamental shift from low voltage to high-voltage architecture, the fundamental problem that needs to be solved with power density and this technology -- breadth of technology capability with innovation breakthroughs that onsemi has delivered to help solve the power density problem. Our goal is to deliver better TCO to the customers, and that will fundamentally drive higher revenue and higher margin for onsemi going forward.

The question is, how high is this revenue growth going to be? When we look at the growth estimates that the analysts put out, some of you are here, it varies across from a 20% range to an 80% range. We have a wide variation of what this is. But, one thing we are very confident in is the technologies that we've talked about, the technological breakthroughs that we are providing today are going to enable us to significantly outgrow the market.

And you're already seeing this in the near term. In 2026, we are going to more than double the AI data center part of our business. And we have visibility into 2027 where this business is going to double again. So, our expectation is for the long term through 2030, we are going to grow at least 10% above the market. We are going to take market share and grow at least 10% above whatever market estimate is out there.

So, if you take an example, if you create a baseline to say the market is going to grow somewhere in the middle, say, at 40% CAGR, then we will grow our revenue on the AIDC segment at least 50%. And what that means is, from a $500 million base in '26, we will deliver over $2.5 billion of revenue just in 2030. AI has -- scaling of AI, where power has become a fundamental problem, has turned this entire power architecture, the high-voltage architecture into an end-to-end connected system. It takes a breadth of capabilities and leading-edge capabilities to play in this. And, as you've seen, the prize in the market continues to grow. And the size of the competitive field continues to shrink. And we are focused on delivering revenue and margin and value to our shareholders by solving the toughest challenges in this AI market. Thank you.

[Presentation]

Okay. On to the markets that I know you really came to hear about, automotive and industrial. I'm Sudhir Gopalswamy, and I'm going to spend about 20 minutes talking about our strategy to grow in automotive and industrial, which together represent the core of our business. And I'll start with automotive. There, we've been very public about our intent to grow at high single digits above SAAR. And I'm happy to say that, in fact, we've done just that. We've grown by 9% in an environment where SAAR has been flat between 2019 and 2026. And the way that we've done that is by executing the recipe that Hassane outlined at the start of the presentation, recognize the megatrend, build a value stack of capability and deliver products that generate business growth.

And, of course, the 2 megatrends that have driven the automotive space, no pun intended, have been the evolution of electrification and electrified vehicles and the evolution of autonomy and autonomous vehicles. In each of these areas, we have actually built these value stacks that have fueled our growth. And the center of those stacks have been silicon carbide and CMOS image sensing, respectively, for electrification and for autonomous. But around that center, we've built an array of ICs that contribute to our growth. And our plan going forward is essentially to do the same thing, to outgrow SAAR by 9%. We forecast that between '26 and 2030, SAAR will continue to be flat while we'll grow our automotive revenue at about 9% a year.

And so, 2 things are different about the next phase of our plan relative to where we've come from. The first is that we benefit from a third megatrend. So, electrification and autonomous will continue to provide tailwinds for us. In electrification, there'll be a continued penetration of EVs across fleets. So, going from 25% of all vehicles today to about 40% of all vehicles by 2030. And, in autonomous, there's an evolution to the levels of autonomy from L2 today to L2+, which yields a lot of benefits and creates a lot of value to semiconductor companies, and to L3 and L4. But, in addition to these 2 megatrends, we benefit from a third one. And that's the transition to software-defined vehicles that are executed based on a zonal systems architecture. So, that third megatrend is a difference going forward.

The other big difference is our strategy going forward is not just to outgrow the SAAR, we will do that, but also shift to value. And so, I'll describe an array of products that deliver more value to our customers, and we intend to share that value that we create with our customers. Now, we'll walk through step by step how we're going to grow this business, starting with electrification. And here, the focus of our product portfolio is intelligent power. And there's a 3-phase or element strategy to grow here.

And they're consistent with the layers of the value stack. So, at the foundation, we're going to continue to extend the leadership that we have in silicon carbide technology. At the next level up, we're going to introduce and proliferate a broad array of products based on the Treo platform that create more value at the system level. And then, at the upper layer, at that system layer, we're going to bring EPP into electrified vehicles in the form of traction inverters.

And let me talk about each of those, starting with silicon carbide. So, over the past several years, we have grown or increased the performance of our silicon carbide technology by about 20% to 25% of a generation. And this has unleashed tremendous system-level value. Now, going forward, we intend to do the same, increase by 25% or even more by generation. And we're going to announce in about 2 months the next generation, which has device structure changes that is going to deliver that type of performance improvement.

And so, when you deliver this performance improvement in silicon carbide, essentially, what you're doing is you're reducing power losses, whether they are conduction losses or switching losses. And, when you reduce those power losses, you have, kind of, a twofer in terms of benefits that you create. One, you improve efficiency, so you get more useful or usable power out. The second, and one that's becoming increasingly important, is that you get more power density.

So, now, customers can benefit from these efficiency and power density gains in multiple ways. You guys already understand that efficiency can translate into either extended range or reduced system cost because the thermal solution becomes much more efficient and you need less battery. So, you avail of those options as a customer. Now, power density is an interesting one. So, if you think about power density, you're either packing more power into a given area or volume. And, when you do that, you're able to deliver, for example, more horsepower or you can pack the same amount of power into a smaller volume. And, when you do that, you're getting the benefits of actually reducing system cost.

So, you again have a layer of benefit that, as a customer, you can choose from with these performance increases in silicon carbide. Now, in addition to these performance gains, we're also extending the voltage of our silicon carbide devices. And the intent here is to enable a better experience with respect to charging, faster charging times. Doing that requires that we actually scale our voltage over time up to 1,400 volts. And, when we do that, we address solutions with 1,000-volt batteries.

We're already beginning to do this, and some of the leadership that we have created for ourselves in the China market is tied to their movement to higher voltage batteries where they're already at 900-volt batteries. This will continue over time in China, and we will scale across the world, okay. The foundation is silicon carbide. All of these innovations raise the bar and distance us from the rest of the field. The next level up is then to introduce a wide variety of ICs. And these ICs, as I said, are based on the Treo platform, and they range in complexity, but all of them solve very specific system problems. So, we have power protection devices and low dropout voltage regulator devices that scale across the power tree and help our customers implement those full power tree solutions.

And the power tree starts at the source, which is either the high-voltage EV battery or a 12-volt going to 48-volt lower voltage battery, and it culminates in the nodes or the devices that ultimately consume the power. We're also introducing intelligent current controllers for traction, and I'll talk more about that in a minute. And then, LED drivers that are actually responsible for delivering power to the LED lights that are increasingly adopted in systems. And then, finally, that same Vcore capability, the controllers, coupled with the smart power stages that Achyut was talking about in data center, also applies to power the brain, the central computer in vehicles. So, a range of products. Let's talk a little bit more specifically about one of those, which is the intelligent current controller.

So, for that, let's just get a little context. If you look inside a traction inverter, and remember, its job in life is relatively straightforward, take power from a battery and deliver it to a motor. At the core of that, at the center of that, you need high-voltage FETs like the type Hassane described. And, today, the most prevalent one is silicon carbide. So, silicon carbide, again, benefiting from those sequential performance improvements is the essence of a traction inverter. And it's coupled with a gate driver. And, as the name implies, that gate driver just drives the silicon carbide and you switch it as fast as you possibly can, and that's how you generate power. In addition, there are a number of other system components, and you see some of them outlined here. This is the industry standard inverter.

Now, what we're doing is introducing new capabilities in the silicon carbide FET, we call that sense FET capability, and new capabilities in our new class of product in the gate driver family, which we call the Intelligent SiC current controller. And the simplified view of what these things do is they work very tightly together to deliver superior performance. The idea is simple, that if I can sense the FET current and other characteristics that determine reliability like, for example, temperature, and I can respond very quickly, then I can actually drive that FET to a higher performance than I would otherwise be able to do. And, when we do this together, we will deliver a one generation improvement in performance, in essence, for free. So, take any silicon carbide generation and you get a one generation performance boost, and you already know how OEMs will be able to utilize that.

And also, because we're integrating some of the components on the BOM, we're able to reduce the system cost for our customers. And so, this is something that we are sampling this month, and we've already pre-engaged with a variety of different customers on the solution that combines these 2 elements and customers are genuinely excited about this. Silicon carbide foundation, these ICs that create value like the silicon carbide intelligent current controller. And then, at the highest level, it's bringing EPP to traction inverters. And so, you see here an idea of the size of EPP for traction inverters, but it's probably a little bit more helpful for me to show you.

So, this is something called a power box. It's the essence of the traction inverter. And, inside it, you can see these 3 modules, and those 3 modules carry the silicon carbide FETs and it's coupled with this cooling solution here. And, again, this is essentially what a traction inverter is. You couple it with electronics, something called the DC-link capacitor, and you have a traction inverter. So this is the existing state-of-the-art. We're delivering solutions at this level of complexity.

Now, this is the same capability, but now leveraging EPP. So, with EPP, you get a dramatic increase in volume, so 2x what we're talking about here. And, at the same time, because it's smaller and because of the innovation that we're creating, you get a 2x increase in power. So, 2x increase in power in half the area gives you 4x the power density. And, when you get a 4x in power density, it obviously delivers you the benefits that I described a moment ago. But, I think much more importantly, it creates design flexibility. So, Inoue-san at Subaru in his video explained that, that's a value proposition.

By reducing area, you're reducing the consumption of a very precious commodity, space in vehicles. And, you also can do very creative things. So, now, I can consider putting this traction inverter in, for example, each of the 4 wheels of my car. And, when I do that, I can deliver, call it, a megawatt of power in each of those 4 wheels. So, for high-performance vehicles, this is a breakthrough. That's an example of one of the things you do, design flexibility. Another thing is the same module, the same system, power system by simply populating or depopulating parts allows you to scale as an OEM from the low end of your fleet in terms of power, all the way up to the high end of your fleet, single platform, low end to high end. That means you spend less R&D resources to test these things and you spend less in manufacturing because you have a single platform. This is another extreme value-add for our OEM customers.

And then, in addition, because it's smaller, you get all of the benefits associated with efficiency. So, this is a real breakthrough and customers like Subaru and other high-performance vehicle manufacturers are truly excited about getting started with EPP, okay. So, that's the growth plan for power. Let's transition now to sensing. In sensing, there are again 3 elements of the plan. The first one is to take advantage of the natural evolution that is going to drive more sensor content. And the second is that we're going to improve that sensor technology fundamentally and increase or create value by doing that.

And then, finally, we're going to tackle some of the biggest problems in perception by extending vision. So, let's start with the sensor portfolio that we have. You guys are very familiar with our CMOS image sensing. We're leaders from a technology perspective in that space. You may be less familiar with the fact that we are #1 in ultrasonic sensing and ultrasonic sensors are used primarily in park assist today to help you park the car and, as well, #1 in inductive sensing and inductive sensing is used to measure the position. For example, the position of the steering wheel or the accelerator and brake pedal, which you do in x-by-wire or drive-by-wire type of applications. So, you're replacing mechanical components with electrical ones, improving reliability by using these types of inductive position sensors.

So, that's the broad portfolio that we have today. And, as I said, there's a natural increase in content that's just happening as autonomy scales. If you think about that in the context of cameras, I think it's readily apparent that as you scale from L2 to L4, you need more. And, we size that at about a factor of 3. And, even in ultrasonic and inductive sensing, we're going to see a proliferation. But, here, the proliferation is going to be driven by more use cases. So one example for ultrasonic is that you can combine it with image sensing to actually clean lenses, and you'll see a demo of that downstairs, many demos you'll see that really bring to life all of the benefits that I'm talking about.

And so, new applications will drive more ultrasonic content. And, similarly, as you have more x-by-wire applications, so will you have more inductive sensors. As I said, not just that, but we're actually improving the performance and the capability of these sensors. In image sensors, one of the big deals right now is to drive higher levels of system integration and the biggest opportunity to do that is to take the SerDes that connects it to other ECUs, like, for example, the ADAS system or the IVI system that exists in cars and integrate that into the sensor ASIC.

So, we're doing that, and that presents BOM savings and system cost savings for our customers. Meanwhile, in ultrasonic and inductive sensing, the focus is on improving precision. So, in fact, in each of these cases, we are improving precision or accuracy by a factor of 20. So, in ultrasonic, what this means is, now, you can detect position of obstacles within 1 centimeter. And, you can see how that improves the safety of, for example, the parking experience. Inductive sensing gets that same 20x improvement in resolving the position and the control of the things that I'm trying to control. So, steering wheel or brake pedal and accelerator pedal. All of those translate into improved vehicle safety. So, all of these, sort of, raise the bar on sensing.

And then, finally, we're going to try to tackle some of the most pernicious problems in perception. So, if you look at all of the technologies that comprise the perception stack today, vision is really good at resolution, but it suffers from bad weather conditions. Radar is really good at measuring velocity and does well in bad weather conditions, but very difficult for radar to resolve where something is and what that something is. And LiDAR has some benefit, but also suffers in poor weather conditions and also has an exorbitantly high system cost. So, how do you improve perception in light of these challenges?

Well, one solution is just throw more at the problem, throw more sensors. In one sense, that's good, but we don't think that's the most effective approach. Instead, ours is to extend vision. And, what we're trying to do is take advantage of that core capability that we have in sensing technology, in image sensing technology, and augment it to solve perception problems. One example is using indirect Time-of-Flight through which you measure the phase shift when you project light and it's reflected back. And, when you do that, you can identify depth of objects and, in doing that, better understand will those objects impede progress while you are driving the vehicle.

And, we're working with customers on building that capability right now. And, potentially even more exciting is to take our short-wave IR technology, which today finds applications in industrial and military or aerospace, defense, and security type of applications, and bring that into vehicles. Now, we're in the advanced technology stage here. But, when that works, what we'll be able to do is see through inclement weather conditions like fog and rain. And so, in aggregate, all of this essentially extends vision and creates what we call superhuman vision, addressing those fundamental perception problems that exist in the industry today.

So, power and sensing and then now moving to the third growth driver for us and for the industry overall, which is the evolution to software-defined vehicles based on a zonal systems architecture. So, the industry is aligned on the first 2 pictures shown up above. The move to -- from this domain controller-based architecture with a hodgepodge of controllers and a wide array of connectivity technologies, kind of, spaghetti through the vehicle to a zonal architecture where you have an Ethernet backbone, and that backbone now extends into the zones using a technology called 10BASE-T1S or single-pair Ethernet.

So, you have Ethernet end-to-end, and you have the electronics aggregated into clusters for zones. So, you have a zonal controller for, for example, the front left, the front right and then similarly for the back. So, the industry is moving to this, and our participation is to provide the 10BASE-T1S technology that exists in the zones. Now, what we're doing is changing the game by introducing a capability called remote control protocol, and that's reflected in the image on the right. And, when we do that, what we're doing is simplifying the entire network. You see, in the first step, there's still a complexity with respect to software.

But, with remote control protocol, what we're doing is enabling that brain, that central computer, to talk directly to the node, remotely control that node. And, when you do that, you eliminate layers of software complexity and also layers of MCU that exist through that network, makes the network very simple to deploy and software-defined vehicles more easy to realize. And, as we do that, we participate today, as I said, with the 10BASE-T1S today manifest as MAC-PHY products. And, we couple those in the cases where we have the node sensor or actuator like, for example, ultrasonic sensing or an LED actuator.

So, our content is the combination of those 2 discrete products. Now, as we move to RCP, what you'll see here is we're subsuming MCU and software functionality. So, our solution becomes richer and saves the OEM in complexity and in cost. And, in doing that, we double the opportunity that we have per vehicle. And then, as we move forward, our intent is actually to create these intelligent node SoCs, leveraging that Treo platform. So, combining the node actuator or sensor with the RCP software and 10BASE-T1S. And, when you do that, you create even more value, 3x of what we could get today with simply the MAC-PHY and the node device. So, you can see how this contributes to growth.

Now, if we bring all of these together, we create an opportunity that scales up to $2,000 per vehicle across all of these, electrification, ADAS, and now zonal systems architecture, up to $2,000 of onsemi content per vehicle. And this is great in and of itself, but also every innovation that we take advantage of in automotive, silicon carbide, zonal architecture, the various sensing technologies, not only drives growth in automotive, but extends our potential to grow into the inductive area.

You see each of these technologies doesn't just apply to automotive. It also finds application in industrial. You see that today with silicon carbide and energy infrastructure or image sensing and cameras. Those are apparent. But, just like that, 10BASE-T1S and ultrasonic and inductive sensors make their way into industrial applications. And, collectively, they lead us to the era of physical AI. You see all the innovations that we talked about fit within the pillars of physical AI that Hassane talked about. He described power, sense, and control and everything that we've talked about fits within each of those pillars and they pave the way for the era of physical AI. And that era has already begun.

If you look at the array of the systems that sense, decide, act, and adapt, it's already pretty broad. It ranges from robot vacuums that you might have in your homes to cobots and autonomous mobile robots and drones and all the way up to autonomous vehicles, which are the prototypical example of physical AI. And, we don't count that in the numbers that's captured in automotive, but it is an example of physical AI. And so, you see here, these systems are -- can be organized in terms of the level of autonomy they have and the level of power that they consume and so the performance that they can deliver. And, for us, the opportunity increases as you go up in autonomy and to the right in terms of more power and performance.

And all of these systems, they don't just sit still. Those systems are evolving as well. For example, the warehouse AMRs that exist today are getting legs and, through that, creating more value. Our factory arms are getting grippers, dexterous hands that allow them more precision in a factory environment. And, even autonomous cars are getting smarter and the ability to reason. So, as these systems evolve on this path to humanoids that everybody is super excited about, they create opportunities for content and growth for onsemi.

Ultimately, as we get to humanoids by 2030, that becomes a factor as well and it contributes. But, in aggregate, the physical AI, again, excluding automotive, represents a $6 billion TAM for us by 2030. And, similarly, the content that we can offer in humanoids, building on the capability that we have in automotive looks very simple. Here, we can scale to about $900 of content in the various subsystems of the humanoid, okay. So, let's bring it all together. In automotive, we're going to grow by 9% a year by creating the system play with EPP, by proliferating content in sensors and expanding through that growth and by creating a new growth engine with zonal architecture.

Industrial, we're going to leverage automotive into industrial applications. And, then, as Achyut talked about, we're going to create a new growth in this AI halo, the industrial side that benefits from the proliferation of AI and, as well, evolve to physical AI. So, those things in aggregate will allow us to grow by 10% in the industrial market. So, the core of the business expands at 9% and 10%, respectively. Thank you. As we do that, we're going to -- obviously, in the products that I talked about, we're going to expand the value that we create. And, when we do that, we share it with our customers. And, as a result, our margins expand. Thank you.

[Presentation]

Okay. Great to see everyone. Thanks for joining us today. For those of you that maybe I don't know, I'm Thad Trent, CFO. Again, thanks for joining. We're going to wrap this up. The guys have done a great job of talking about the megatrends in the markets that we're focused on and the capabilities. So, I'm going to take you through what this means for our financial model and how we create value for our shareholders as we deliver on these promises. Now, I'm going to spend a few minutes, kind of, taking you behind the scenes, showing you what we've been working on for the last 5 or 6 years that maybe you haven't seen from the outside. And I think it will give you some context of how we're set up for growth in this next leg of the company.

So, the first thing we have to do is we have to calibrate on what's happened, right? So, if you go back 10, 12 years ago, the company, highly volatile, unpredictable, did well in good markets, not so well in poor markets. So, through the cycle, you can see the gross margin and the operating margins at that time. We haven't been standing still, and we've gone through an upmarket, we've gone through a down market, and we're coming out of it, as you all know. We haven't been standing still. We've been investing heavily during this time. We've been making changes, structural changes to the company to set us up for this next leg of growth.

And we're starting to see the early signs of this now. So, what you can see here on this chart is that the gross margins are higher in the cycle and operating margins are higher than what they've been historically. So, big structural improvements. We've been working on our Fab Right strategy. I'll show you more on that, investing in differentiated products. We've also exited $900 million of noncore business, and the exits are now done and behind us. So, we're completely done as of Q2. We are driving the operating leverage. And, again, I'll show you more of this, but we're seeing the signs already as we're seeing the revenue growth, utilization coming up, we're seeing the leverage in our model start to fall through. And so, we're seeing a much more resilient model. So, we've had this step function, and now we're ready for the next step function given the resilience that we've built into our model of what we've been doing.

And, if you take that and you look at cash flow, the cash flow margin is significantly different. And this is really a transition of moving from a manufacturing company into a product company, okay? We've made big investments that we're now ready to leverage. And, again, you'll see a step function improvement in our Free Cash Flow as well. We've been making brownfield investments as well. So, I would say, in a CapEx-light environment that we've been driving.

So, I think this sets us up for good growth. Now, the other thing that you haven't had great clarity on the outside is the investments. So, we've made $8.7 billion of investments over the last 5 years. And I'm going to walk you through where those investments were. So, the first thing is R&D. So, $3.6 billion of R&D. The guys have talked about the capabilities: Treo, low, medium, and high voltage, the EPP that we're introducing today, our sensing platform, Sudhir talked about that one. And then we've been investing in our core portfolio as well. So, if you follow the money on the ribbon, you can see that we're leveraging these investments across all of our end markets. So, I think this is another advantage of our model that we can create products and actually deploy them into multiple end markets as these markets mature.

The other thing that we've been doing is some M&A. So we've done 5 tuck-in M&As, $800 million. You can see in there, various markets there. Follow the money, you can see what we've been investing in. These are all in production or ramping very quickly. We've talked a lot about vertical GaN. Hassane talked about the plans for vertical gain there. And then CapEx, $4.3 billion of CapEx. We brought on our 300-millimeter fab with EFK. We've tuned that cost structure up now. We've invested in our franchise in silicon carbide. We've been investing in vertical GaN. We have a fab in Syracuse now. And then we're in maintenance mode on a lot of this. So you can see where the markets go there as well. So if you take that and you roll it all out, you can see we've been investing ahead of the curve, right? We're going to where the puck is going. We're getting to where the puck is going, right? So we've seen these mega trends. We're investing in advance. And now it's time for us to monetize those investments.

So as a result of these, we see a significant TAM expansion. So you can see $20 billion in auto, $16 billion in industrial, and the big one, AI data center, $45 billion TAM expansion there as well. So we've invested $8.7 billion for an $81 billion TAM expansion, focused on the right markets, seeing them ahead of time, having the right products, that's critical for where we're going. So how do you monetize that now? You have to have the customers. So if you look at our customer base, we're engaged with all the winners. We're enabling them. We're working strategically with those customers. We create those products, then we deploy them broadly. We have 9,000 customers around the globe. We have a large distribution network, we're solving very complex problems with our customers. The engagements are very strategic.

The guys talked about -- a lot of it you heard from some of our customers and how they're engaging with us. They're not buying products. They're buying solutions and systems from us, okay? We also don't have customer concentration. No 10% customer and our top 20 customers are 35% of revenue. So broad network, we've been investing in the mass market through distribution as well. That's paying off. We've talked about that in our Earnings Call that we're starting to see growth in that market as well.

So if I take the markets now, the guys did a good job of explaining it. And he started talking about, okay, let's sum it all up for the company. So our other market, this is where we play opportunistically. We don't make big investments here. But when we make an investment, if we can leverage in this market at favorable margins, we'll play there all day long. So we expect that margin or that growth over this '26 to 2030 time frame to be about a 1% growth. And by the way, this '26 number, everything I'm going to show you is based on Street consensus. It's not our estimates, it's actually your estimates. So we're using your numbers as a baseline.

On the AI data center, Achyut talked about this, 50% plus, 5x revenue growth when it comes to AI data center. If the market grows at the high end of that range, we're going to outgrow that by 10%. So if there's upside there, you'll see upside to this number as well. On the industrial side, we're going to grow at 10%. About 40% of our industrial revenue is broad-based kind of traditional. We expect it's going to grow about GDP plus, that's historically what it's done for us.

The other 60% is secular, and it will be growing at double digits. So in there is also the AI halo. We've got other markets there that we're playing. You got physical AI that Sudhir talked about that will start to kick in as well. So we think there's about a 10% growth when it comes to industrial. Automotive, we're going to outgrow SAAR. We've got $2,000 of content per car. If SAAR -- we're assuming a flat SAAR during this time frame. If SAAR actually grows, you will see this number grow as well. So there's upside to that number as well if the market grows faster than what we're projecting here. So when you sum that all up, you get to about a 12% to 14% growth rate for the company.

This is higher than what we've been historically. Like I said, there's upside to that as well. If you do the math on that, again, using the 2026 consensus numbers, you get to just under $11 billion of revenue in 2030. So how do we scale? How do we support this growth? If you go back to what we've been working on over these last few years and again, behind the scenes is a little bit more. We talked about where we started this in 2019. We started with Fab Liter. We had a bunch of subscale fabs. They were really from a bunch of acquisitions that hadn't been integrated well. And so we've exited and divested 5 fabs, 1 back end that we've announced as well. And so what we're doing now and where we sit today is we actually have a really clean network that's working well together. So we went through Fab Right. We're continuing to take cost out. But now we've got a network that we can actually scale effectively. So again, brought in the 300-millimeter fab cost advantage to that.

You can see Syracuse, that's for our vertical GaN. And we've got external. So we're still projecting that we'll be manufacturing about 65% externally, even in this model as we go forward. So the key point here is it's rightsized and it's built to scale. We're ready. So -- and it's not a big capital investment here. So there won't be additional brownfield investment during this time horizon. We can do this at about a 5% capital intensity. That's where we've been running the last few years, what we've been talking about. So we can actually expand within this footprint and scale the business to that $11 billion number without having to add significant investment in capacity.

Also, if you look at the current footprint versus the previous footprint, and you go back over time, look at them both fully utilized, you kind of put them apples-to-apples, the current cost structure is 17% lower than it was historically. So that shows the Fab Right initiatives that we're driving, and we're continuing to drive, are taking cost out. So it's not just about reducing the number of fabs, it's actually tuning up those fabs to be more efficient and to take cost out. So we've got more to do there. So how does that impact margin?

So first, it's scalable, it's efficient, it's lower cost. So when you go to margin, you'll see here our target remains 53%. That's what we've had for a while here. We're not raising that target. But if you listen to everything that Achyut, Sudhir, and Hassane talked about, those are all products that are favorable to this target. The 53% is a milestone. It's not a destination. So we're going to hit the 53% and then we'll talk about going higher at some point in the future.

So if you walk through the pieces, you've got utilization, 650 basis points. This is just the absorption cost that we have. So as we ramp -- continue to ramp our utilization, that will improve. We've taken our utilization up significantly this year, exited last year at 68%. We're roughly around 83% in Q2, exiting Q2. So you've already seen us taking it up given what we're seeing in the market.

On the Fab Right, 225 basis points. Now it's a little bit different than what we've talked about in the past. It's a little higher. But this also now includes the divestitures that we did previously, the 4 divestitures. And what we're doing now is we're actually going to move some of that production to the outside to keep capacity for the high-value products that the team is talking about internally. So we'll maximize the margin out of that. So we get about 225 basis points off of that. Now 50 of that is already in the bag. We have announced the 2 divestitures. It's now just a matter of time that we'll start to recognize over the next 18 to 24 months as we execute on that.

And then the last piece is the mix and ramping of new products. So these are the products that are favorable to margin. There's also a mix if you think about the change in what I was telling you on the end markets, there's favorable mix change on that one. And this is the result of us keeping that capacity for that high-margin product in there. So that's how you're going to get to 53%. So we'll do the math here. So structural changes, innovation, execution is putting us in a good spot. We talked about the 12% to 14% revenue growth. If you take that 53% gross margin, the profit -- gross profit dollars are going to grow by 22%. And the operating margin is going to grow by 30%. So operating margin is going to grow 2x. Operating income is going to grow 2x revenue.

So this is the leverage in our model. As we ramp, you'll see more dollars falling through the bottom line. So if you take that to cash flow, and you look at what we've been doing on cash flow, we've been creating strong free cash flow. Right now, The Street consensus is about $1.6 billion in free cash flow for 2026, 25%. If you look at 2025, our free cash flow margin was 24%. That was in a down market. So that's clearly coming through, that the company is structurally different and these actions that we have taken are actually coming through.

If you look at the investments that we made, we made our big investments in the capacity that I talked about earlier. So during this '23 and '24 time frame, we invested about $2.2 billion just in capacity, bring it on East Fishkill, silicon carbide, all of the capacity is there for all of this ramp that we've talked about. And that's why we're comfortable with that 5% capital intensity going forward.

So if you model it out, we're looking at free cash flow more than doubling by 2030, more than $3.5 billion, and the free cash flow margin is going to go up. Our target is going to 30% to 35%. It was previously 25% to 30%. So again, I think, again, the leverage in the model. If you look at what we've done between '23 and '26, we bought back $4.2 billion of shares while investing. That's 92% of free cash flow. And we've reduced our share count by 12% during that time. So the natural question is, what are you going to do with that cash? So let's talk about what we're going to do. We're going to continue to do what we've done. We're going to invest in our business, differentiated products, higher ramp, higher growth, we'll continue to invest there. We'll continue to do M&A to bring in capabilities of the company, faster time to market that exists. If we can do it quicker externally than internally, we're happy to do that. So we're going to continue to invest in our business. So you saw that on the slide that I showed you earlier.

Next piece is balance sheet flexibility. We're in a great spot here on the flexibility. We've got plenty of liquidity. We're going to continue to keep that as well. And then after all that, we'll continue to return cash to shareholders. So plan is 100% free cash flow back to shareholders, net of everything else. We've got $5.3 billion left on our existing authorization.

So moving to the financial model, summing it all up. What I want to call out to your attention is the '25 and '26 numbers. And again, the '26 number here is Street consensus. But if you just compare '25 and '26, this is where you can see the leverage in our model already taking place as the market is starting to recover. So you could see gross margins going up, you see operating margins going up and you see our free cash flow improving as well. So if you look at the 2030 model, we've hit on most of this, but we're looking at 12% to 14%. Previous model was 10% to 12%, so we're taking that up, primarily driven by the AI data center growth that we didn't see a few years ago.

Gross margin milestone, 53%. We'll talk about more later once we hit the 53%. Operating expenses, we've been investing through the downturn. You can see where we've been, 18%, 19%. And model is 15%. Now it's slightly higher than what it was previously because we're investing heavily, but still an improvement from where we are today. You get to an operating margin of 38% and our CapEx, as I said earlier, 5%. We can scale this business to $11 billion by only investing percent of revenue during this time frame. And then free cash flow goes $30 million to $35 million previously, it was $25 million to $30 million. So a big improvement in the model. We think it's compelling there. And this is stand-alone onsemi. It has nothing to do with Synaptics. So if you're curious about what we're going to do with the Synaptics when we close that next year, we think by next year, we'll close. But this is the stand-alone Synaptics plan as it sits today, as we project today.

So looking at greater than 15% growth, this is higher than where The Street currently has Synaptics. We're looking at margins higher than 55%, so accretive to our model. This is differentiated products, premium products, we're sure we can improve those margins as well. And that gets you to an operating margin greater than 30%. Now there's $200 million of synergies in this number over the first 18 months, gets us to accretion, and by the way, that includes stock-based compensation because we report that in our non-GAAP numbers. If you exclude the stock-based compensation, it's accretive coming out of the chute, but we account for stock-based comp and non-GAAP.

We believe over the long term, there's actually more synergies here on the manufacturing side. So we believe there's some opportunities for us to pull some of their products into our manufacturing footprint and actually improve these margins and improve the operating margin. So I believe there's, actually over the long term, I think there's some upside to the operating margin here as well. But this is standalone. So just going back to the onsemi standalone, so you can see it again. This is without Synaptics. You guys can do the math on the combined company, but we do believe there's -- Synaptics is accretive to the overall margin or model.

So we think about wrapping up here. So coming back to the foundation, step function improvement. If you map the model, we're now positioned for another step function improvement in the financial model there as well. So we're going to accelerate the growth. We're going to continue to work on costs and manufacturing costs. We're going to continue on our Fab Right initiatives. There's leverage and the key point here is that the targeted operating margin is higher than the historical or the legacy gross margins. So I think this clearly shows this company is a different company in position for growth, earnings growth, revenue growth, and free cash flow growth.

So as we wrap up, we guys did a great job talking about the markets. The mega trends in each one of these AI data center, automotive, and industrial. We talk about it differentiated capabilities. We have unmatched breadth, advanced platforms. We've been investing in the right products. We have a compelling financial model. And when I think you put it all together, you've got expanding markets, you've got differentiated capabilities. And you combine that with the discipline that this leadership team is exercised and proven over the last 5 or 6 years, you'll get durable and profitable growth. Thank you.

[Presentation]

All right. So we'll open it up to questions. We have a lot of people here. So appreciate if you could keep your question to one question. And we've got some mic runners here. So just raise your hand, and we'll get through all the questions.

Vivek Arya from Bank of America Securities. Maybe if I could turn that into a clarification and a question, Thad, if that's okay with you. So the gross margin progression from 40 to 53 is that just kind of a linear progression? Or did you see kind of different steps along the way? The question really is on the data center business. Because I think, Achyut, you mentioned a doubling into next year, right, to $500 million, right, getting to like $1 billion plus. But then if we take your 2,500 plus by the end of the decade, that suggests that growth slows down a lot just at the time when 800 volt is supposed to take up a lot. So is that conservatism? Is it like -- how do we, kind of, square this deceleration in growth with when the market trend is just about to take off.

Yes, let me take the first question on the gross margin. So the gross margin, like in the short term, the biggest driver of gross margin is utilization, right? So that's going to be market-driven. The next biggest piece is really that mix and layering in these other products, right? We'll continue to execute on our Fab Right. I already mentioned that 50 basis points is in the bag. So think about that in the next 18 to 24 months. Is that playing out? But as we look here today, I think it's really going to be market dependent. So I would sit here thinking modeling, very linear, right? If the market takes off faster, we should hit it faster.

I think -- I talked about if SAAR grows, that's going to be a tailwind to us. If AI data center grows faster than what we've modeled here today, that will be a tailwind to us. So there could be some step functions in there. Right now, for modeling purposes, based on what you think the market is going to do, you can make that call, but I would think about a pretty linear progression. You've already seen over the last couple of quarters, we've had some nice step functions. So if the market continues to take off at this rate, we could see improvement to that. So it could be better than linear.

The number you mentioned, I mean that's just a function of exactly What the estimates are out there by the analyst. If you look at it, everybody is more confident in near-term growth and then people are not sure exactly how fast it's going to be in the outer years based on how quickly the data centers are going to be built, but how many data centers can be built? So regardless of what the market grows, we are very confident growing at least 10% over the market. Now if you look at the last couple of years, the actual growth has actually been more than what the analysts were predicting a couple of years ago also, right? So I think as you get closer to that, and I think as the estimates get more and more confident, if those numbers keep going up, we would definitely grow faster than that. So the numbers we have are just purely a reflection of what the 4-year analyst estimates are today. That's what we are modeling it off, saying we'll grow higher than the market. But if history repeats itself, that growth is going to be a lot higher, and we'll continue to grow with that.

But like you said, a lot of the high voltage is going to drive the growth. We're expecting about -- there's a penetration rate, right? The 800-volt is not going to go flip the switch and it's going to be 100%. So there's that progression along with the timing. So if we -- as we get closer, we see the higher than the 40 baseline that we picked, that we're going to grow 10% above that. We've proven it over the last few years. We'll continue to do that, but it's really the length of that time horizon. But the content is there.

Vijay at Mizuho here. Thad and Hassane -- Hassane, I like your shoes there. Nice. Just a quick question for Hassane. I think as you look at the -- at your data center side, with the content, we said 15,000 going to 115,000, is that -- are you assuming 145-kilowatt rack going to a megawatt? Can you talk to what's the mix of silicon carbide and GaN at that 145-kilowatt rack, which is a 1 megawatt, as -- and obviously, that helps you capitalize on your -- some of your capabilities there.

Yes. So a couple of things. One is, yes, you're going to -- you can think about it going from the about 100, 120 in that range going to the megawatt. Of course, there's different hyperscalers, different capacity within the rack, but that's about the range we can think about to go from the 15,000 to the 115,000. From a voltage perspective, we're not looking at it as here's how much vertical GaN, here's how much silicon carbide or here is how much silicon.

The whole progression of our high-voltage capabilities that we've -- that I've shown in my slide, is really what we are targeting. If the customer is optimizing for area, then vertical GaN is how you're going to achieve that density. If the customer is optimizing for just the efficiency because they have the area for whatever reason, then we have silicon carbide already. That's what we're shipping today. The flexibility and the breadth of the portfolio in high voltage, combined with intelligence and EPP is going to give us the optimized solution. We're going to meet the customer where they need us to meet them. So we don't have to pick is the beauty of it because we have that breadth and the breadth comes that differentiation, and we are going to meet the customer at any point of the optimization. We do that in automotive. Sudhir highlighted it very well. If you want more horsepower, pack more into that area. If you want to save money, just shrink the area. That flexibility and putting it in the customers' hands is a competitive advantage that we're going to leverage.

We got one here. Okay.

Quinn Bolton from Needham. I wanted to follow up on the 800-volt data center opportunity. There's been some market chatter that 800-volt may be pushing out to the right. So can you give us your sense, when do you expect to start to see, sort of, the first sidecar racks beginning to ship in high volume? And what are you assuming for the true 800-volt data centers driven by solid state transformers. When does that start to come into the model?

Yes. So from the first part of your question on the 800 world racks with the sidecar architecture, we expect that to start ramping in the next 12 to 18 months, sometime towards the end of next year. Yes, that I can -- there is always a concern when it comes to a new market transition, but there are solutions also for that, that we are working very closely with our customers on. So we expect that to start towards the end of next year getting into the 12- to 18-month range.

So the second part of your question on the solid-state transformers, that might take maybe another 12 months after that. So I would say sometime in the end of '28, early '29 is when we would start the first wave of the mechanicals going to solid state, essentially.

Chris Caso, Wolfe Research. The question is on the Synaptics acquisition, and I know you've discussed it, but aside from the financial targets, it wasn't a subject of a lot of discussion today. To give you opportunity to talk a little more about why the 1 plus 1 is more than 2 in that acquisition and how that may affect the rest of ON's business going forward by having Synaptics inside the portfolio?

Yes. Well, first, you're not going to hear a lot about it because we haven't closed the deal after announcing the deal, we're 2 separate companies. So I can highlight what we've said about the markets in general. Every product that you've seen here connects to a connected compute platform that is at the center, whether it's physical AI and robotics, AMR, and so on. So you see that leverage of why 1 plus 1 with our portfolio, we're able to deliver that value to customers. That's an inflection point that is forward-looking. So we do see that as expanding in the future. But today, Sudhir talked about it, robotics, for example, are happening already. So the opportunity is here today.

On top of that, the go-to-market that Thad talked about, with the breadth in the channel, that will also continue to expand. But one thing I do want to highlight, and I want to correct a word you used, it's not 1 or the other. What you've seen here today is a very strong core that we've built for onsemi, which actually allowed us to expand our TAM into a connected compute that is built upon a very solid core that is already delivering value based on the financials that we've delivered over the last 5 and 6 years, also moving forward as a core business that we had because without a solid core, you can't solve a core problem with M&A.

We have a solid core. We are coming at it from a very strong position of power, no pun intended, but both technology and financial performance, and adding to that expanded TAM is where Synaptics comes in once we close the deal. So it's not 1 or the other. It doesn't do anything to what you've seen here today. It accelerates the financial model and it builds upon a technology and a capability that we can offer our customers as a combined company.

Chris Rolland, Susquehanna. I guess, first, a clarification on my question. Just Thad, did you contemplate pricing and pricing increases in the gross margin model? Or is that additive? And then for my question, it's really around AI. It was a pretty remarkable TAM number or the [ $47 billion ]. It's perhaps twice, sometimes 3x as large as some TAMs that competitors have given. The 2 biggest components in there are Vcore and IBC. Congrats on your first Vcore win or your vertical -- or lateral power win. Can you talk about addressing this from here whether you have the technology to both go vertical and then eventually IVRs to address that. That would be great.

Yes. So Chris, on the margin side -- sorry, I lost the question.

No. So the pricing.

Pricing. Yes, I was thinking pricing in terms of margin. So yes, so in the last couple of calls, we've talked about -- and we've been very clear, we're raising pricing, right? We're raising pricing with our customers. We're in our second round that is to offset the input costs that are already hitting us today, right? So that will be a tailwind to margins over the short term. So I think you'll see that improvement layering in, in the next several quarters, right? That's something that is sustainable and gets us to that 53% faster. But we've got the headwind of the input cost hitting the margin line already without the benefit of the pricing.

And to answer your question on the largest part of the market in Vcore and HV IBC, I mean the simple answer is yes. We have all those technologies. We have the lateral power. We have the vertical power, as you saw, we're all enabling that with our partners today. and even IVR, we have the technology ready for it. We have all the combination of capabilities for it. It's -- it just depends upon when our customers want to go deploy that into their systems and what makes sense for them. But being ready for all 3 generations of technologies, for lateral and VPD and IVR, we absolutely have all the technologies ready to help our customers go implement that as soon as they are ready with it.

And you can check out some of the implementation because that 2 millimeter, the one that showed Achyut showed in his slide, we have it downstairs on boards. And you can see, and I will tell you, there is no solution today in the market that has been able to achieve a 2-millimeter Z-height. I guarantee you that. It's downstairs. It's on a board and it's sampling with working with customers. So you can see we have the technology, we have the capabilities. IVR is basically putting that technology at some point in the layer depending on the hyperscaler or the XPU, but that's a timing with the customer that we will work on. But this is back, again, to investing ahead of the inflection points as we see them to mature the technology, so we are able to push that through with customers.

Joe Moore from Morgan Stanley. I was really interested in a lot of the platform approaches that you guys talk about with Treo and EPP. And I know there's a progression of you've already moved from discretes to modules and things like that. But how pervasive is the customer interest in those kinds of platforms versus buying more discrete modules? And just is that a selling effort from your part? Is it something customers kind of naturally pull?

Sure. So let me clarify. So obviously, the approach, there are 2 reasons you would approach a technology with a platform. One is scale, our scale. Like you saw with Treo, for example, we introduced a platform which is a BCD 65-nanometer, BCD as a platform that allows us to proliferate very, very fast across all markets and all applications with a very well-managed OpEx, which back to Thad's financial, gives us that leverage. So we're able to scale using platform much faster than you'd need the OpEx. That's the same thing that we do with our customers. So it's not one or the other.

I showed the value stack pyramid where we have the technology as the foundation, then you have product solutions all the way to systems. It's not one or the other. It's, again, the flexibility. Having the platform gives us the flexibility to meet the customers where the customers need us to be. If the customers got the expertise to solve those system level or those solutions, that we will happily provide them differentiated technology based on the platforms like Treo.

If the customer is creating a more complex system, and they actually ask for like a module, say, "Onsemi, you do the module, you figure out the thermal and the mechanical," then we are able to deliver a solution or a system level. The 2 power boxes that Sudhir highlighted, we're able to ship either the 3 modules that are sitting on top of it or, in this case, we're able to ship the whole thing with the metal jacket.

Again, it's not one or the other, that flexibility that we're able to meet the customer where they need us to be is a competitive advantage, but we can only do that by developing platforms rather than point products. Otherwise, you can't scale. So it's no different than our sales force and our engagement with the customer at the same levels, just a different [ cut ] product, system product or semiconductor product.

Gary Mobley at StoneX. It seems like you might have an emerging first-class problem when it comes to capital allocation. The Synaptics acquisition is an all equity acquisition, and you're signaling that your free cash flow is going to accelerate, maybe generating $3 billion, $4 billion in free cash flow by 2030. So -- and I would assume that you're going to slow your pace of acquisitions as you're trying to integrate Synaptics. So if that's the case, and if you can confirm that, you're -- what are you going to do to return cash to shareholders or manage that first-class cash generation problem.

Yes, you're right. It's a good problem to have. Look, our capital allocation policy doesn't change, right? It's invest in the business, organic, inorganic. We've already achieved the balance sheet flexibility. After that, it is returning the free cash flow to shareholders. 100% free cash flow is planned to go back to shareholders, absent and after the other investments. So nice problem to have.

John Vinh from KeyBanc Capital Markets. A couple of follow-up questions. First on EPP, how quickly do you see that platform scaling in? And what sort of incremental investments do you really need to bring that to market? And then just a follow-up question on the data center business. You talked about there's only one other competitor out there that has an end-to-end solution that can compete with you. Can you just talk about what your differentiation against kind of that other competitors?

Sure. So I'll cover EPP. So from an EPP perspective, what I had in my -- and you'll see it again in the demo room downstairs, there is no incremental investment. We actually do it with our standard 12-inch process in East Fishkill. The kind of the technology platform, the differentiation and the patent protection that we put on it gives us a pretty good competitive advantage as far as how to do it, but we've been doing it. We're sampling all out of our East Fishkill fab with no additional CapEx outside of what Thad talked about within the baseline of the 5%. And I put that under the maintenance category because we already have it. That's point number one.

Point number two, as far as introduction, we're already sampling in all 3 markets. You will see an example of every 1 of these markets downstairs. So just for everybody here, we have it in VPD for the AI data center, where we have an EPP-based vertical power delivery that goes on top or below or lateral or under the XPU. Back to the prior question of, are we ready for it? The answer is yes, we have it both next to and under. In industrial, solid-state circuit breaker, that is both in the industrial and AI data center or AI halo, including inside and outside. We have those already sampling with our JFET embedded into a silicon.

And then actually, this small power box is 100% EPP and 100% internal. So that gives you an idea. The scale is ready, the tooling is ready, the technology is ready, and customers are evaluating all the way in through automotive. Now of course, the revenue is going to layer based on the design cycles for the respective markets, but you can just layer those out, respectively, with AI data center, industrial, followed by automotive. So we're very excited about it because it is based on a silicon 12-inch process that we already have.

And to the second part of your question, when you look at how do we differentiate ourselves, I mean, fundamentally, the entire focus on the investments we're making is to provide differentiated technologies so that we can drive the value from a margin perspective with our customers and share in the value that we create. And then the 3 core technologies that we have developed here, that Sudhir and I both talked about, one is EPP, right? I mean, it solves the thermo-mechanical problem that you have as you -- the electrical content scales or to solve the power density problem. So EPP is something that today is unique technology we have developed a breakthrough technology that onsemi has developed to differentiate ourselves from our competitors.

The second one is Treo. I mean this is the most -- the intelligent control platform that you have, along with fabs up to 90 volts. Nobody else has a combination of 65-nanometer BCD technology and embedded, sort of, 90-volt fabs together that can solve a lot of problems in, again, all of these end markets from AI to industrial to automotive. And then the last piece, again, is the vGaN piece, unique -- probably the best technology for high frequency, high efficiency and high voltage, all 3 together.

And I think this is what we've invested in for the last 2, 3, 4 years. We have a significant lead on our competitors here. So when you put a fundamental power technology. When you look at the intelligent control and the BCD technology and then the system integration technology on EPP, I mean that's a very unique set of differentiation to have versus any competitor in the market today.

Next question?

Kevin Cassidy from Rosenblatt Securities. My question is around vGaN. How scalable is the manufacturing that you have? And also what's the barrier to entry from competitors when it comes to vertical GaN?

Yes. So scalability, I don't think that's -- it's a good problem to have, but we already have the manufacturing site. We already have the fab. So it is not something that is being developed on a bench exercise or a site fab. We have a dedicated vertical GaN fab that is only running vertical GaN in Syracuse. This is where we have been producing and sampling the qualified technologies that we've delivered. So that's point number one. I'm not worried about it. It will be -- it's not a -- when we get to capacity expansion needs, we will do it as a brownfield within that 5%. So there is no new fab or a greenfield investment that is needed. So we feel pretty comfortable about the scalability of the existing footprint that we have.

As far as defensibility, a couple of things. One, nobody has been able to figure it out yet, and we know the companies that have tried because it's the same companies that have been saying how it can't be done while we've done it, and you'll see it downstairs, and we've sampled customers, so I would argue otherwise. Number two is the patent portfolio that we have on the technology and the device on the vertical GaN, which is the GaN on GaN, gives us that moat that we can protect that investment. And three is time. A lot of these technologies, once you're designed in, you're not going to get a redo because they're complex. They're thermal, they're electrical, they're mechanical. This is not a component or a die that we are shipping. So the barrier of entry is going to continue to increase as we continue to develop on technologies. We're in our second generation vertical GaN.

So I would say we're probably half a decade ahead from the closest competitor because nobody has yet come out with a sampling strategy on anything close to it. So we feel pretty good about it. We feel good about the barrier of entry, and we feel good about the road map in conjunction with, for example, Treo that adds that intelligence to just the device.

Matt Prisco with Cantor. I guess on the data center side, how often are you guys working with customers across the entire power chain from grid to core versus specific stage? How does that -- how does the embedded power platform potentially change that dynamic? And is there any way to quantify the benefit that ON can offer with greater collaboration providing more of a complete solution across that chain to customers?

So we work closely with all of our major customers. Some customers want to work with it directly. Some customers want to farm out some pieces of that to some of their partners that we work with very closely also. But we have a close working relationship with all the major players, hyperscalers, or processor players in the AI data center market. And each of them, like Hassane said, they want to take this value that we provide in a slightly different direction based on what constraints that they want to solve, what their investment thesis is, what their CapEx thesis is. But from a customer relationship perspective and customer engagement perspective, we are deeply embedded with all of these customers. Sorry, the second part of the change?

It changes the behavior that we have with the customer. To give you an example, just a solid, say, circuit breaker that Achyut showed. Instead of given 3 of these discrete components, we're giving them EPP to put on their board as an example. So it doesn't change the aspect, it changed the product definition, if you will, where EPP as a platform becomes the product once you embed the electronics in it and cutting 50% and 20% cooler changes their dynamic from a cooling perspective and they get that benefit. So it doesn't change it. It just makes it more competitive and more defensible because unless somebody can shrink those 3 packages, which I know it's not possible because we make those packages also, by 50% or cool it 20%, you have a sustainable competitive advantage that is not electrical. It's thermal and mechanical. And that's the 4 differentiation that I talked about. The ability to solve all 4 gives you a "non-typical" semiconductor competitive advantage, but more of a system competitive advantage, but that the customer benefits from as well.

Mark Lipacis, Evercore ISI. Thad, I thought the context that you provided about the -- how the transformation has manifested in the business models was really interesting. You reminded me 10 years ago, we thought about commodity products coming out of ON. And as you have improved the business model and you shoot for the next leg of improvement on the business model, I was also struck by the comments from the customer clips talking about integration partner. How should we think as you execute the next level transition, the business model improvement, to what extent is that from just coming up with higher quality discrete products versus providing your customers with solutions and platforms like EPP. If you could just help us understand how should we think about onsemi going forward on those dimensions?

Yes. I think if you summarize of what do all of this -- all of the innovation that we talked about, whether it is the platform innovation that you're referring to or how we go about giving it to customer because it is not, again, one or the other. We're still giving solutions, which is a chipset, if you will, to use non-power. You have the Treo or drivers, and you have silicon carbide. We can put them in EPP or we can give it separate.

They still provide that value when given together. That cross-selling, that value creation that gives the customer the flexibility to leverage that value the way they can monetize it is the competitive advantage we're going after. And you're going to see that in margin expansion via mix. So as we get more and more of the mix of our revenue into those high value, and I want to call it high-value products because I want to remind everybody, yes, we introduced EPP. Yes, we introduced a vertical GaN. They are complementary to a very broad portfolio that we already are ramping like Treo, like a lot of the core technologies that we have, and together are going to create that value at a system level for the customer no matter by which the means that we deliver it, either components that work very well together, better than any competitor, or as an embedded power platform in the case of EPP.

And that is the competitive advantage. I want to highlight the breadth of the portfolio and how we deliver it is a competitive advantage all by itself and you're going to see that in margin expansion and growth through scale.

Yes, Mark, I would add that if you look at the chart that I had on the R&D investments, there was a significant investment in the core platform as well. So as Hassane said, we're still investing there. That mix shift, as we shift more into the higher value and the more of those solutions and systems, that will obviously help with the margin. But we have been making investments there. I want to be really clear. We're not exiting that business, right? As I said, the exits are behind us. So it's building on our core competency.

Yes. Go ahead, Tom.

Tom O'Malley with Barclays. So outside of data center, auto is your biggest TAM expander, and you showed 3 ribbons, kind of going into auto. So you had electrification, ADAS, and then the zonal side. So you've seen the beginnings of the electrification cycle start. And can we talk about barriers of entry on the zonal side and also on the ADAS side? There's obviously been a lot of questions around moats in China. Can you talk about those other 2 ribbons? Are the moat deeper there? And where does the geo exposure look like with those 2 others?

Yes. For sensing technology, and it's a very few set of competitors that actually have sensing technology of any type, let alone the variety that we have. So it's actually the technology itself. I mean image sensors are among the most complex technologies that exist in semiconductor space, and there are different vectors of complexity. But image sensor to get an image and infer what that image is, is a very complex test.

So it's the fundamental technology and then you extend across the breadth of technologies. So it takes a long time to develop the product. It takes a long time then to get the design win associated with it and to establish credibility that you can solve perception problems with these sensing technology. That's the biggest barrier to entry.

In zonal, it's an entirely different phenomenon. You're -- it's a very new market and relatively emerging in terms of the solutions there. I think there, the focus is being first to provide a winning solution and getting kind of that level of traction in that space. So that's the first element, right? So what we're able to do, and we didn't elaborate on our solution, but we have this hybrid hardware-software type of solution in the existing zonal products that we offer, the 10BASE?T1S products. And what that allows us to do is to respond quickly to changes in requirements and changes actually ever present as the standards emerge. So we're able to create value that way, which gives us the time to market.

From that point, providing value above standards, providing value above the zonal -- existing zonal architecture is really the source of kind of a moat or differentiation. And so as we do things in the way of adding RCP and enabling and simplifying networks and as we integrate that 10BASE?T1S with other functionality, we think that those continue to provide competitive differentiation and add to a moat over time. But it's emerging.

And the -- just to prove. So we're obviously -- we started talking about 10BASE?T1S. We're new specifically to networking and software-defined vehicles or zonal. And on the last call, I talked about our first automotive disruptor ramp starting actually at the end of this year. So not only have we introduced new products, because that's what Treo platform enables is venturing into new applications as those inflection points happen, but also providing that value that Sudhir talked about, that translates to a win even for onsemi as a newcomer in this emerging market.

All right. We probably have time for 2 quick questions.

Onsemi team, thanks for your time today and a fantastic presentation. Harsh Kumar from BMO. Hassane, I was fascinated by the EPP product. Is it fair and accurate for me to think that you will not have a lot of competitors here because it requires both silicon, silicon carbide, and GaN and they just don't a lot of players. And so my question really is how well covered up are you with patents should somebody try to get in? And then maybe I'll ask Thad for a clarification. Is it did you assume a 0 SAAR from 2026 to 2030. If so, what would be the biggest risk to the scenario that you laid out to your long-term model?

Yes. So we're assuming a 0 SAAR, right? So if SAAR is higher, that's a tailwind. Whatever SAAR is, we're going to grow -- outgrow by high-single-digits. We've been doing that consistently. Sudhir laid out the reasons why we'll continue that. So indexed to SAAR.

Yes. So just to close on that, and I'll answer the EPP, the growth is coming from a lot of the content that Sudhir talked about with the transition that is happening as -- you can think about it as a mix shift within the SAAR. Of course, as the SAAR goes up, that mix shift is compounded on top. So it's actually a tailwind. The SAAR increasing will be a tailwind because EVs are going to be a higher percent of SAAR, even if the SAAR is flat, software-defined vehicle is going to be a higher percent of SAAR even if the SAAR is flat. If SAAR is up, we'll be up high-single-digit above that. So you can do the math.

On the EPP, it is -- so yes, I would agree. And I would say it is the most competitive power platform in market today. The best-in-class today is PCB embedding. What PCB embedding doesn't cover is the thermal. It does the size, but it doesn't -- it does it at the expense of electrical and thermal performance. EPP is the only technology today, as a platform, that is able to deliver it, not because we have silicon carbide, and silicon, and vGaN. It is the platform by itself. What we put in it could be 100% silicon carbide or it could be 100% silicon. So you can think about it as a technology that is the most advanced packaging that solves thermal, electrical, and mechanical. How comfortable are we in it? One is it's very hard to make. I know that because we struggled through it, and now it's ready and sampling and delivering on the promise of the investment thesis. So that's point number one. And two, along the way, we cover our IP with patents not just on the idea, but the process by which we go about it. So we feel very comfortable about it.

It's validated by our customers that have seen the value and we'll continue to push what else we can integrate in it. And like I said, you'll see very impressive examples that are products that we develop for customers downstairs.

All right. So we're going to wrap it up there. Thank you for joining. Please join us downstairs.

All right. Good morning, everyone. Thanks for joining us on day 2 of the DB Technology Conference in Dana Point. I am Melissa Weathers. I'm one of the lead semis analyst here at DB. And this morning, we are grateful to have onsemi, join us up on stage. We've got Hassane El-Khoury, CEO; and Thad Trent, CFO. Thank you both for being here.

Thank you.

So I think the best place to start here, let's talk about the cycle and your outlook on the cycle. On your last earnings call, you talked about strengthening demand signals after kind of finding the bottom in the first quarter of this year. So can you talk about the signals that you saw in the quarter? Any kind of booking visibility of lead time trends that you'd call out?

Yes. I mean, overall -- so we talked about -- you mentioned in the first quarter, we talked about automotive kind of hitting the bottom. We do believe right now we're shipping to natural demand across all of our end markets. Natural demand is -- doesn't mean strong or not strong. It's just at least we're at an equilibrium. What makes us positive about the outlook and where we are in the cycle is really look at the metrics that drive the business. We've had our book-to-bill above parity already.

We've had a much better visibility. If I remember a year ago, we're talking about we're on a good quarter. We have visibility maybe 90 days out. Right now, we have visibility -- much longer visibility into '27, sometimes into '28, depending on the product and the markets. Sitting here today in '26, we had better visibility about '27 than we had while we were in the same spot in '25 into '26. Our lead times have been extending in overall, but we do have constraints in some technologies where we see the strength across a lot of the end markets, commonalities about the end markets. All of these are signs of an improving end market demand.

Again, not all of it is equal. A lot of it is driven by our AI data center, which we've taken that number -- that outlook up from doubling to more than doubling year-on-year. But however, the business health across all of the metrics that we look at from an operational side have been moving all in the right direction.

So if you had a crystal ball, as you think about kind of the slope of that cyclical core recovery, should we be expecting like a chip shortages, COVID-style, magnitude of recovery? Or like what shape do you think it's going to take?

Yes. I think -- well, that depends on how quickly some end markets wake up to what the realities are. And what I mean by that is we all know AI data center, we have the outlook, the demand is strong, and we're shipping to that demand, which is also creating some constraints in some technologies that are shared across a lot of the markets. We talked about some of our power technology, which is driving a lot of our demand in AI data center, we have some constraints. It's not broad-based concerning, but we do have technologies where we are constrained. We talked in the last quarter that we had to make some allocation trade-offs between auto and AI data center. But overall, to answer your question about the shape of it, we have the capacity.

Let me just start with that. So we're not worried about capacity. You're not going to see a big CapEx cycle from onsemi. That's all behind us. We have the capacity. We're comfortable about the growth. We're comfortable about the capacity we've installed. The challenge is going to be how quickly does demand layer into the backlog. If it's going to be a snapback, there's always a cycle time. We do have some inventory in die bank. We can launch into back end. That's a 2-week cycle time but that quickly depletes if the snapback is very steep.

If the snapback is kind of a gradual increase where you have the AI data center strength, and it layers in an outlook of an automotive strength over the last kind of 2, 3 quarters, then we can start building for that and we're able to support it. If we get orders today and they need them in, I don't know, October, November, and you get a snapback of orders. It's like, yes, I'll see you the -- lead times are going to extend, allocation is going to start. It's going to be back like the COVID days. it's going to actually be worse than the COVID days because back in COVID, AI data center was not a big consumer of capacity.

Today, data center is one of the largest consumers of capacity. So the call to action that I've been giving our customers across auto and industrial is put in your backlog, stand behind it, and we will together manage on how to build to it because we do have the capacity.

And Melissa, just to put some numbers to what Hassane said, shape of that recovery. We exited last year with our utilization of 68%. Last quarter, we were at 83%. So in a matter of 6 months, we've taken utilization up very quickly because of the demand that we're seeing. What we think is going to happen is our cycle time, you think about from the time we launch a wafer to an end product is 4 to 6 months.

So I think as we guided, we said, look, utilization is probably going to go plus or minus from here on. If the recovery gets deeper again, our utilization goes up further. That helps gross margin again. But I think just that rate of us improving the utilization shows you the strength of the business what we've seen of that order pattern just getting that much stronger that faster.

I'm trying to think back to the past cycle, where did utilization peak in the last cycle?

So we took some capacity offline. So if you think about where we were before, it was kind of in the mid-80s, fully utilized for us is in that kind of 92%, 93%. So you can see we're getting there.

Got it. And then -- so we'll get into the data center side. It's been a little while since I followed you guys closely, and I'm like, okay, on to the data center company now. But so outside of the data center, as we think about like industrial, automotive, some of the more cyclical businesses, can you walk us through A&D, those kinds of things? Can you walk us through where are the hotspots, where are you still trying to see some recovery in demand?

Yes. Even within every one of the end markets, let me start with automotive. Automotive, we talked about the stability. We have not seen a replenishment cycle nor have we seen kind of demand uptick. If you look at the SAAR overall, SAAR is kind of actually slightly down to a first order. But we expect automotive to grow about 6 or so percent year-on-year, which -- if you think about our target and the content growth that we talk about in automotive, we've always talked about high single digits above SAAR. So we're already delivering on that in a stable demand environment.

Of course, electrification, which is driven today by China EVs where we have a majority share, that's outgrowing automotive in general. So again, if you look at automotive, you have the disruptors with -- that are more skewed to automotive, whether it's regional or by customer, those are doing much better than the rest of the market and much better than the rest of the automotive market, which is lifting the content for us.

Industrial, same thing. We talk about industrial being kind of that, in general, over a longer period of time being the GDP kind of plus. However, within Industrial, we have secular markets, which is about 60% of our industrial market. You can think about energy storage system, energy infrastructure, AD&S, medical, a lot of these, our energy infrastructure business is growing 40% year-on-year, and that secular side of the business, I think posted 25% sequential. So you can see a lot of that strength is being driven by that.

Now of course, the industrial side, the energy infrastructure, we call it the AI halo. The strength that we're getting is really a build-out of industrial that is driven by the AI data center buildout. But those are secular where we can really put a finger on and say, this is exactly true demand. It's a healthy demand, and it's a demand signal that is out in the end market, and we are supporting it. That is kind of the auto and industrial and a lot of the growth segments and the growth applications or the submarkets that we are seeing, but they're all tangible, they're all secular and they are all end market demand. But net of any replenishment or any uptick in demand, for example, in auto. That's all going to be tailwinds for us.

And just to clarify on the inventory side, whether it's distributors or at the end customers, how would you characterize the health of overall industry inventories at this point?

Look, our inventory in the channel is right where we want it to be. We want to have 10 to 11 weeks. We're in that sweet spot. We've been there for a while. We effectively managed the inventory for our distributors, right? They would take more inventory if we ship it to them. We hold it back. I think at the end customer, obviously, that's harder for us to track.

I think in automotive, as said, I think we're shipping back to natural demand. So we've gotten through the inventory digestion. In some cases, automotive is still dangerously low. They haven't changed their behavior yet. But we don't think there's a lot of inventory out with the customers. Our inventory and our balance sheet is actually very healthy as well. So I think we're in a good spot, and we're lean. And what we've been saying back to kind of that utilization is we can match the utilization to the demand recovery, right, given that we don't have to bleed through inventory at our customers in the channel or on our balance sheet before we start ramping up manufacturing.

On the pricing side, can you summarize how you guys are approaching pricing at this point with some of these end markets getting a little bit tighter? Like what has been on's approach? And how do you guys plan to manage through it going forward?

Yes. So look, we did our first price action in April. We're doing another one now. We've been very clear on that. We have seen our input costs go up significantly because of just the inflation, right? And so that's already hit the P&L, where I think we haven't really seen the pricing hit the P&L yet.

So this next second round, it will start to layer in over the next couple of quarters. So we've done that across the board, across the entire portfolio. We also have supply constraints on certain lanes and certain products. So we're surgically raising price in there as well. But the pricing environment is a good environment, obviously, right now, but it's primarily us passing cost on that we've already been incurring.

On the -- let's get into the data center side. Very exciting business for you guys. I think you're a little bit -- you were a little bit late to the market, but now it's growing nice and fast. So talk about your entry into this market, what parts are you most excited about? What kind of growth can we expect?

Sure. So overall, in the market, if I would describe the opportunity in the AI data center, we have our IR deck posted on our website that shows kind of the -- what we call the power tree, which is grid to core and all of the opportunities onsemi has across every one of these kind of step conversions to get us to the core.

Last year, we talked about as we penetrated that market with new products, we are generating revenue across every single part of that power tree. So of course, people think about onsemi as a high-voltage power play. Yes, that's true. That's how we started. The AI data center. But today, revenue is coming in pretty nice and even from all the way to high voltage, which is closer to, call it, the plug all the way to what we call the smart power stage, which is right at the XPU.

It is broad, meaning it is end customer diversified. And it's starting to be regionally diversified as other regions build out their AI data center infrastructure. So we're very happy with the baseline that we built in '25. We entered the year and said we were going to double that revenue in '26.

Last quarter, the first two quarters came in ahead of where we expected at the time we guided. So we increased our outlook for 2026 to -- we're going to more than double. We haven't given a target is, of course, going to be lumpy from a growth perspective, but we do expect for the year as things are starting to ramp for the second half. So we're very excited about that.

Forward-looking, the opportunity gets larger for us. Of course, the TAM continues to grow with the build-out. But what I'm excited about is on top of that baseline, strong baseline that we've done, you're going to start seeing whether it's end of '27, beginning at '28 or somewhere in that range, that transition to 800-volt. The transition to 800-volt is actually right up our alley. We've been doing 800 volts in automotive for over 5 years. We're #1 in that market. We have the technology. We have differentiated technology.

No other peer has -- so as that transition gets there, we're able to deliver compelling high-value solutions to our customers, and we're starting to see that in the design and what we sample. One of them you hear me talk about is vertical GaN, which is a very different technology than any one of my peers talk about GaN. And I say that not because we have a better mousetrap. Vertical GaN as a technology, we are the only ones today in the world that is able to manufacture that because it is a very hard complex device physics and material to manufacture. We've been able to do it.

We're sampling an AI data center and in automotive already. We already have the manufacturing site here in North America. So we're very bullish about the capabilities that we, as a company, not just vertical GaN, but the breadth of the portfolio of power can bring to bear as we start seeing that 800-volt transition.

I definitely want to touch on the GaN side. But just as we think about the go-to-market for like the 800-volt and for these new data center power applications, like talk about the go-to-market, talk about your engagements, how the design-in process is going and also the competitive intensity?

Yes. For the high voltage or call it, whether it's 800 volts because we're shipping 800-volt today is just not back at the rack side but in the power tree. So if you think about it at a high level, it depends on the go-to-market for our customers. anything that lands on the Board is going to be with the design in primarily with the hyperscaler or the GPU vendor, XPU vendor because that's very tightly coupled to the XPU itself.

When we're talking about the power from plug to core, that's more -- you can think about it as the deltas of the world, the LITEON, the Great Wall, the Flex Power. So that's a very different go-to-market where they deliver the power conversion, call it, box that goes in the rack or on the side of the rack and so on. So the go-to-market is different depending on where -- because for us, I mentioned we're covering the whole power tree, which means that the go-to-market is very different depending on what stage we're in.

Now as that transitions to an 800-volt, the 800-volt on the back plane of the rack then that's going to be more of an XPU or a hyperscaler. So it's going to shift a little bit as the go-to-market changes, but we're able to do and we have been doing today across the board. And that's part of the diversification strategy. We've had where we wanted that kind of the coverage to be much broader. We've done this in automotive already. A few years ago, you heard me talk about the customer concentration and the only way out of it is by geographical distribution and customer distribution of revenue, we're in that same playbook for AI data center, and we're happy with the strength of that business across multiple end customers, multiple end regions, that's going to continue to fuel that growth.

So those engagements have started and are...

Those engagements have started. That's what's driving more than doubling of this year, and that will continue in the next year.

On the GaN side, yes, GaN was another one that I was surprised on the GaN company too now, that was all organic -- it was all grown organically within ON's business? Or were there acquisitions associated with it?

So a couple of things. If you think about the GaN as a market, there are two different types of GaN without getting too technical. There's -- I'll just summarize it into -- you have the vertical GaN and you got the lateral GaN. Everybody in the world that talks about GaN is referring to lateral GaN, which is GaN on silicon. We do that. We're doing that with a partnership. We've announced a partnership with Innoscience and a partnership with GlobalFoundries.

We're doing that because the differentiation for lateral GaN is really on the control and the driver, which is what we're doing internally with Treo. And we are partnering with very strong partners externally to get access to the lateral, the GaN on silicon devices. Again, very competitive approach that kind of the best of both. We're very strong in the control and so on because we've invested organically in Treo. We combine it with competitive GaN devices, and we go to market that way. We've actually announced the complete go-to-market at PCIM a few months ago from a power conference. So that's on the lateral GaN. We did that with partnership and organically internally.

The vertical GaN, that development has been all organically. So we've done a small tuck-in acquisition that came with some of the IP. So we're very happy with the IP moat that we have and the patent moat that we have. But the whole world when we talk about vertical GaN, it depends on if you talk about people that understand the power of vertical GaN. They say this is the holy grail for power. For people that don't have the vertical GaN, they will tell you it will never work. And that's kind of the -- how it works.

I'm here to tell you where we have the fab. It's up and running. We are sampling. So we have physical samples at customers on their boards being tested. So the proof of life is non-debatable anymore. And we're very happy with the results that we're getting, and it is a very competitive approach to power delivery.

Now it is not -- the next question you asked is, well, what does that mean for silicon carbide. It's actually a complementary technology to silicon carbide. What I mean by that is -- if you can solve it with silicon carbide, we're going to solve it with silicon carbide. We have a very competitive silicon carbide JFET portfolio and MOSFET portfolio that's growing very nicely in AI data center. But there are segments in the market where size is actually a constraint or density is a constraint, and we need a vertical gain to be able to resolve that. So it's incremental. It gives us a much broader portfolio than any of our peers have today, and it puts us in a very innovative solution where we can engage at a much higher level with customers on forward-looking designs.

And where is that GaN fab?

So the fab is actually in Syracuse, New York in North America.

Got it. And then the competitive intensity, are there other vertical GaN players who you're...

Nobody has been able to deliver a vertical GaN device to date. And by the time they figure it out, they have to work around our patents. That's always the good first to market.

Also on the data center side, but outside the walls of the data center, I think that -- the power infrastructure outside those walls, it's harder for investors to kind of picture what the opportunity looks like there. So can you talk about like what's the TAM on the energy side? How fast is that growing? Is it bigger or smaller than within the data center?

Yes. So we're -- obviously, we'll be talking to that in a lot more detail at our -- coming up at our Analyst Day on -- if you haven't seen the announcement, we're having our Analyst Day on September 16.

I'll be there.

Which is when we're going to be talking about a lot of the opportunity and the content growth across our end markets. But specifically to your question we talked about -- that's what I refer to as the AI halo in industrial. That business -- the energy infrastructure has been strong historically for onsemi. We're #1 in energy store systems. We're extending that into solid-state transformers. But the growth is coming back specifically in 2026. That's the 40% growth I talked about, pulled by the AI halo.

And that, for us, the opportunity is incremental to what we've been doing in that market. That energy infrastructure or the secular side of industrial is about 60% of our total industrial. So it's been growing nicely over the last few years to become a major part of our industrial segment, and that will continue to grow. That's -- if you think about solid-state transformers to support that 800-volt transition, historically, transformers have had no electronics content. So when we go to solid state, that's all incremental for us.

Energy storage, that's a growth business. That market is already there. It started, I would say, 4, 5 years ago. And it's going to accelerate from an end demand perspective driven by AI data center. So very different on the industrial. Nevertheless, it is all high-voltage play which is where a lot of our strength already lies. A lot of things I talked about from GaN and silicon carbide and even IGBT, all of that lands into that AI halo or the industrial secular side of it that we're servicing today.

Maybe the next lag of AI people are saying is physical AI. Can you talk about what are your offerings today in fiscal AI? When do you see this market inflecting in a big way? Maybe we can tie that into Synaptics as well.

Sure. So if you think about physical AI. Today, we all consume that the opportunity for AI is in the data center or adjacencies or AI halo, but it's driven by the AI data center. And we all in this room consume AI if that's a word, I guess, consuming AI. We consume it through the computer or through tool sets. So it's a digital consumption of the AI.

AI, the inflection point for physical AI, which is purely the AI capabilities going out of the walls of the AI data center, that's the physical AI, and that's going to be with an articulating application. I mean by articulating is applications that need power. They need sensing to sense the world. They need compute or capabilities of compute or connected compute and the control side. Those are the four pillars of what physical AI. And if you think about what does that describe today, the market is with robotics.

I'm not talking necessarily humanoid. That's a forward-looking robotics segment. But today, robotics, we're very strong in robotics. It started with the factory automation, the robots and so on. It went to AMR, which is factory floor that required increased the level of sensing because now it's kind of going around humans. So the safety requires a lot more sensing and control. So today, onsemi's opportunity is the power sense and control. We deliver ultrasonic sensing. We deliver inductive sensing. We deliver image sensing, and we deliver the whole power domain capabilities in order to power those robots.

Forward looking, of course, that's going to extend into the humanoid, and we're starting to see that. I was this morning watching the humanoid Olympics, which was a lot of fun, but you're starting to see that becoming now. Of course, the market is not going to be with robots for Olympics. This is just the capability showcase of what robotics usability of humanoids are going to be, whether it's a factory automation upgrade, AMR upgrade, that's going to deliver more content for us. Just we could have more motors, more of everything in a humanoid.

So that's an opportunity moving forward. But that's -- today, we are a power sense and control play in these, and we're very happy with the access that we have to those markets and really the -- already the growth that we are seeing in these markets.

Do you have a sense of timing like when we could see that business inflect for you guys?

Look, I think -- so I don't see an inflection, meaning it's going to be this way because robotics is already growing. Actually, the largest segment, the largest TAM today in robotics is really the AMR and the factory automation. Humanoid is going to grow but not to a level to overcome the rest of it. That's why you don't see an inflection.

When you're layering a fast-growing business, but a smaller scale business, you're not going to see an inflection in the high level, but you are going to see the inflection within those submarkets. Humanoids will have an inflection depending on the headlines and what you believe, we're from a volume perspective, probably 1 or 2 years out because we're seeing all the design in, we're seeing the architectural changes that we're making today.

The beauty of it is all of the products we are delivering in automotive, we are servicing the robotics business with. You heard me talk about ultrasonic sensing. We're #1 in that in automotive -- inductive sensing. We're #1 in automotive. And most humanoid companies or robotics companies today are car companies, whether it's China or North America, with a few startups that are disrupting that business. So we're very happy with our penetration and exposure in that market. We're going to grow as that market starts to inflect.

I want to get to the automotive side. But as we think 10 years from now, what's the bigger opportunity for ON? Is it data center AI or physical AI?

So 10 years from now, it was a very long time. When we're talking about the pace of change, I'd love to know kind of 2 to 3 years. But overall, I think AI capability. How -- what is AI going to look like 10 years from now or even 5 years from now, is the exciting part that we have. So how do we address that?

If I don't have an answer, which I don't. How do we address it as a company? We address it with capabilities. I just gave the example of a lot of the capabilities we've had in automotive have translated to industrial. And when AI data center came out, it's all the same capabilities we've had in auto. A lot of the AI halo is capabilities we've had in industrial. So our focus is really on capabilities and the pace of delivering those capabilities. So my view is for onsemi perspective, whatever that pivot is, whatever the next inflection and whenever it happens, we have the capabilities to be able to service it.

You mentioned which you write on the AI data center, we were later to the party than most, but look where we are today. We didn't have to reinvent the wheel. We just had to shift some of our capabilities to that market. That is the moat we've been building over the last 5 years is building that company that is a versatile technology company that is able to service these segments. Because what we want is the inflection doesn't have to be big for us to be able to go after it. A lot of companies go, well, it's a small SAM or TAM we're not going to go after it. We need to be able to go after all of these, and that's by building a capability base line of technology that you're able to do all of that.

And maybe a quick comment on Synaptics with that...

Yes. I mean if you think about everything I said about our play in robotics and human or the physical AI realm, the third -- the fourth pillar that I didn't mention we're doing organically is that connected compute side, where at the center of every one of these systems is a connected compute, where we do the other three around it. We do the sensing that is -- drives the compute. We do the power that powers the compute, and we do the control that is the output of the compute.

So Synaptics brings a strategic capability at the center of the physical AI realm. But it's not forward-looking. It's in the robots that we're talking about today and where the majority of the market is today, they're at the center of it and that brings that nice cross-selling capability that as a combined company, we were able to support our customers with.

Now why Synaptics is very important. Although I talk about compute, people say, yes, but there's a lot of companies that have MCUs, which is very true. But talking about inflection, MCUs are where the market has been. If you talk about where the market is going and the capabilities of compute that are needed in the systems of tomorrow, back to the working on the inflection now as a capability to be able to leverage the inflection, that's an AI-first compute. You need to have an AI engine, not a microcontroller pretending to be an AI because you put a label on it.

And that's -- if you look -- if you read between the lines or the writing on the wall, most microcontroller vendors are trying to figure that out because they're coming from a legacy and everybody is talking about it. Everybody needs it. Synaptics brings that. They've done a very good strategic choices and that I'm very happy about. I'm happy about the strategic combination of the two companies. We expect that deal to close in mid of 2027. So more to come on that.

But from a technology perspective, it does bring the fourth pillar. And of course, as we started working together on -- back at the diligence side, I was very happy to see that a lot of their other business, the non-Astra or the non-connected compute business is already a strong business in an inflection point, which is a tactile sensing that people don't appreciate yet. Every robot we talked about, every sensor we talk about needs the tactile sensing to grab things. They do that. They have very compelling technology and capabilities. So that was kind of a pleasant surprise, I would say.

One more on the top line and then I promise that you'll get involved. So on the automotive side, you touched on this a little bit earlier about SAAR being kind of flat to slightly down. But it's still a big part of your business and you guys have a lot of opportunities in automotive. So I guess, rank order, like where are you most excited about in auto, what kind of growth do you think?

Yes. So I think for automotive growth, we'll -- you're going to see us kind of continue to deliver on that content drivers for us that high single-digit growth above SAAR. We've been able to deliver that. If you look at the last 5 years, from end of '19 till, I think, 2020 -- beginning of '26, our growth was 72%. So if you take that and you turn it into a CAGR, it's a 9.5% CAGR over a 5-year period in an area where SAAR was not that exciting either.

So we've been able to deliver that content. What's driving that content today and what will continue to drive that content, of course, the top is the electrification. I call it electrification because it's not just battery electric vehicles. You have trends in there, which is plug-in hybrids. Plug-in hybrids are becoming higher volume of the electrification, but the opportunity for us 4 years ago, those were IGBT driven or silicon power-driven. As OEMs push a higher range of plug-in hybrids to 100-mile range, we already have two designs in China and North America for a plug-in hybrid with silicon carbide. So one is electrification and the economies that it drives around and back to the energy infrastructure.

The second one, which is very -- I'm very excited about because we started ramping production now is a software-defined vehicle or the architecture that allows that with zonal. We introduced part of our Treo platform, we've introduced our 10BASE-T1S Ethernet, Ethernet connection. Our power smart power, which is at every zone as well. Those are all ramping starting this year that will continue to provide that growth that I talked about, which is the content growth. So we're participating in those inflection points in automotive on top of an already strong base of electrification.

So we'll continue to deliver those. Of course, we have our sensing franchise that will continue to deliver and I can go down the list of incrementally more and more content that we are introducing that will continue to deliver that high single-digit growth above SAAR.

Sorry. One more. On the Treo side, can you walk us through what's the reception initially to Treo? What was the motivation to start something like Treo? And how can that kind of change how you're engaging with customers?

Yes. So back on the capability. So Treo in itself is a technology and a design platform. It's not really the product. So it's a BCD. It's a 65-nanometer mixed-signal analog platform with a very high voltage range. And I say that because there is no other technology or no other peer today that is able to deliver a 65-nanometer up to 90-volt. Why that's important?

Because when you have 90 volts, now you're talking about high-voltage applications that we can do monolithic. We're able to do analog mixed signal at high voltage, which is typically today, the high voltage is outside and people focus on the analog kind of as a device. We're able to combine the two. So that's the capability. From that capability, we're delivering all of these products, Ethernet. Onsemi historically has not been in automotive Ethernet connectivity. We're already shipping that first to market to a lot of the OEMs that we have.

Was that organic?

That's all organic. That's all based on the Treo capabilities that we have back to -- we invest in capabilities so we can kind of deliver a lot of these products. So that's point number one.

Point number two is it delivers a pace that we are able to deliver. We talked about 6 to 9 months to deliver a product on Treo. That's a -- that used to be 2 years for a mixed signal analog. So the pace of capability back to capturing inflection points, even that we don't know are going to happen, you need to make sure your technology is solid and your pace is fast. That's what Treo is delivering for us.

On top of that, of course, we have all the drivers. We have all the power, we have all the controllers, all of that is based on Treo. So to answer your question on adoption, the fact that we created Treo, then we delivered something like 10BASE-T1S. And we are already in automotive production tells you the compelling value that customers see to pull on the adoption forward. We're already ramping in medical devices in the industrial. We're already ramping in automotive, and we've already ramped in -- we have the AI data center as well.

So if you think about it, what does that provide? It provides a franchise that is high growth in all of our end markets and more importantly, the margin expansion. So the margin profile on Treo driven-based products is in that 60% to 70% gross margin. And we've talked about 2030 being $1 billion revenue. So you can start seeing part of the margin bridge that Thad I'm sure will talk about is that mix of new products. Part of it is Treo delivering 60% to 70% as a larger percent of mix towards the 2030.

Thad, you're up. On that gross margin bridge, you've got your target, I think 50-ish percent you're now in the 40s. So maybe give us your bridge of how we get from current levels up to back up to 50%?

Yes, let's bring it home. Let's talk about all the cool differentiated products that Hassane has talked about and where it takes us financially. Just to calibrate you, in Q2, we had a step function in our margin improvement. And in Q3 with our guide, another step function. So all the work that we've been doing in our manufacturing footprint, in our portfolio, rationalizing our portfolio, exiting low-margin business. fab right, taking cost out, the mix shift that we're seeing, we're now starting to see that leverage come through.

So even in Q2, you saw that our earnings grew at a much faster rate than revenue. So through the downturn, we've been investing. So now as you think about -- as we go forward, the biggest mover in the short term is utilization. I was touching on that earlier. But in Q2, there's 650 basis points of headwind just from underabsorption of the utilization. So you can think about every point of utilization is 25 to 30 basis points of gross margin improvement. So you can do the math. We're at 83%, do the math getting up to 92%. That's your 650 basis points.

That's one of the key drivers. We've got more fab right initiatives that we're driving towards. That's about another 200 basis points. Last quarter, we announced the divestiture of two additional manufacturing locations. So that's 50 of that 200 that we'll start to see some of that in '27 and most of that out in '28. The products that Hassane talked about, Treo, the others as they start to ramp, we get favorable mix. Think about that as being another 200 basis points. And then the last piece of it is the fab divestitures we did a few years ago. We built bridge inventory to support those divestitures that we're building -- that we're burning through. As we start manufacturing that inside, that's about another 200 basis points.

And then the last piece of it is the fab divestiture we did a few years ago. We built bridge inventory to support those divestitures that we're building -- that we're burning through. As we start manufacturing that inside, that's about another 200 basis points. So that gets you with a 5 handle, well above a 5 handle. And our target is a milestone, not a destination. So everything we've been investing in through this downturn is in differentiated products. We have a core that is very solid. It allows us to build on that.

So as we project forward, we have this nice trajectory going forward. And our OpEx we've been investing through that downturn. So we're not going to grow OpEx anywhere near what the revenue growth will look like for the next several years. So there's a ton of fall-through from margin, leveraging the OpEx investment and that all falls through. The other thing I would tell you is through a downturn last year, our free cash flow margin was 24%. So that's another kind of nice launching point that we'll continue to improve on as the top line goes up.

Any sneak preview of the Analyst Day that you want to give us?

Must be present to [ win ]

On that bridge inventory, how long does that take to burn down? Is that a matter of qualification? Or is that just a matter of...

It's a matter of time. So we peaked that inventory mid-2025. So we've built that inventory. We're now bleeding through it. it's taken us longer to bleed through it than we anticipated just because the market got softer, right? But look, last quarter, I think we were down 8 days to 67 days, something like that. So you can see we're burning through it. And then that's when we'll start manufacturing that inside of our footprint as well. So all as planned. It will take us a couple more years to bleed through it all. The good news is we paid for that. So that's a tailwind of free cash flow again.

East Fishkill, where are utilization levels at East Fishkill at this point?

So it's below the corporate average. It's improving. That's our 300-millimeter fab. Treo goes in there. The big investment in East Fishkill is behind us. So all the capacity is there to support the growth that Hassane talked about on these new and emerging products. So it's just a matter of time as we fill that up. And as these new products ramp as the revenue grows, we'll continue to do that. So it's not necessarily a qualification. It's just the new products ramping.

On the OpEx side, you kind of touched on this already. But with all these new projects with getting into the data center, we're trying to address these things very dynamically. How do we think about the trajectory of spending going forward? Like...

You should think about this as where we are currently is our new baseline, right? So going forward, think about that growing at a much slower rate than revenue, right? But we're above our model today. We've got to grow back into our model. So that's why I'm saying that the big investments are there. You should think about this going forward. Think about it as kind of low single-digit percentage increases for the next several years, not a big step function.

And then business exits. That was a big priority for you guys when you took over as a management team. I think you're very, very close to completing the...

Well done. Yes. We're done $900 million over the course of several years, $900 million annualized done. We said that we were completed at the end of Q2. So that's all behind us. So you can think about Q2 is now new -- the kind of the new base from that has all the exits gone.

So that was a business that was highly volatile. It took us longer to exit than we thought because the way we were exiting was we raised pricing, customers stuck around a lot longer. We have the capacity, so we kept it. As the market downturn lasted longer. Competitors started coming in, cutting price, and we just let it go.

So as you look at your portfolio today, are there any soft spots areas that maybe you would want to optimize further? Or?

Product-wise, no, no. In the manufacturing footprint, yes, we're still optimizing. That's that other 200 basis points. But in terms of the portfolio, no, we're -- we got the right portfolio at this point.

Have you sized recently what the consumer electronics exposure is? I'm asking because memory pricing has obviously gotten a lot higher than where people were thinking. And so I'm just trying to assess that.

It's a very small piece of our business. It's in the other, other, right, because we put the AI data center and other. So it's in the other, other, which is a very small portion of our business and so small that we're really not seeing any impact A lot of it from the memory shortage.

It's more on the enterprise than the consumer electronics. A lot of it is enterprise, which we're not seeing the soft because they are getting the supplies that they need.

On the CapEx side, your existing footprint, are you happy with where you are? How do we think about CapEx? Is there any maintenance CapEx when you look out for?

Look, we're in maintenance mode at this point. We said we invested heavily in capacity, right, for silicon carbide, for EFK, we built them all the -- brought in all the capacity to support the Treo ramp. We've been running in that kind of mid-single-digit percentage CapEx intensity. I don't see that changing for several years at this point, right?

We can expand that footprint within our manufacturing -- the footprint that we have today, brownfield investments without having to do any significant CapEx investments. Our revenue has to get to about 30% higher than where it is today for us even to think about adding capacity, right? We have the ability to flex inside and outside as well. So about 35% of our production is managed outside.

So as you come out of this, the first thing you always do is load up your internal fabs and then you start flexing to the outside. So we have plenty of capacity and just don't look at having to bring in any meaningful -- we're not breaking ground on a new fab anytime soon, just put it that way.

Okay. Great. Well, thank you both so much for joining us. And everybody, have a great rest of your conference.

Thank you.

Thank you.

Good morning, everybody. My name is John Vinh. I cover semis here at KeyBanc Capital Markets. We're delighted to have the Onsemi team with us today. We've got Hassane El-Khoury, CEO; and Thad Trent, CFO. Welcome, guys.

Thank you.

Maybe I'd like to start off is maybe talked about the earnings call, you talked about prioritizing data center demand over autos and industrials. And I'm wondering if you could just unpack that comment a little bit because I didn't think that short-term capacity was fungible, right? Because as you think about parts that you supply into the data center is very much different. I mean the parts you supply in autos and industrial. So maybe we can start there.

Sure. So the comment I made, obviously, we also framed it into a temporary adjustment that we've made, not a strategic redirect. And we expect that to normalize, call it, over the next couple of quarters when the impact of utilization that we took up will start coming out from material. But to comment -- to answer your question more directly, at a product level, it is not fungible. And what I would call a product is when the product is fully assembled because then it's a footprint and has to go on a certain board, a certain physical form. But from a fab perspective, not just from a fab all the way to technology, it is fungible. When we talk about 1,200-volt silicon carbide, it is the same 1,200 volt that we supply, for example, in automotive or in 800-volt systems and AI data center.

It is fully fungible up until it gets to almost die, which is 2 weeks away from finished goods. If you think about a 2-week cycle time for finished goods, all the way up until that point where it gets its, call it, marketing part number or MPN, it is fungible. So that's the decision we made. So when you get orders in short time and you have to make priority calls as long as those priority calls are on a kind of a 2-week -- now if it's packaged and it's kind of ready to go, you can't just change the mailing address. So that's the flexibility. Now compare that 2-week change in end product to a little over 30 weeks of lead time, we're able to make those decisions while we start those new wafers for the auto and industrial orders that we got, but that takes about, call it, 3 to 6 months to come out. So that's why I said it will normalize in the next couple of quarters, just a matter of time. You saw utilization went up. So we already took utilization in response to that demand, but the output is yet to come.

Great. Other than increasing utilization, is there anything else from a supply perspective that you're doing to respond to this uptick in demand that you're seeing?

No, not from a -- we have the capacity. We talked about we took utilization up to 83% fully utilized. You can think about it in the 92%, 93%. So we're not fully utilized. We did a step function based on the demand that we saw, but that's not fully utilized, meaning we're not capped out on capacity. What we are managing now is the slope of the orders that came in. If you get a lot of orders within 13 -- let's say, everything is a 30-week lead time. If you get a lot of short lead time orders, you're just not going to service them, just a matter of fact from a lead time perspective. So it's not like we can't do the capacity and we need more CapEx. Our CapEx remains unchanged. CapEx remains mid-single digit.

We will take up utilization as we see demand coming in. And even when we get to that 92%, 93% utilized, we can flex to the outside. So it's not like CapEx is going to have another CapEx cycle built in here. So we feel pretty comfortable with the growth trajectory that we have for the company overall. and the flexibility we have. And remember, as utilization goes up, the margin gets the tailwind from the utilization. And that's our short-term margin expansion, and you start to see it in Q3, even throughout this year.

Great. Maybe on that front, Thad, maybe can you just remind us just what the puts and takes on gross margins over the next 6 to 12 months? Is it primarily going to be driven by utilizations? Or are other puts and takes that we should be thinking about here?

Yes, utilization is going to be the primary driver. If you think about where we've gone with utilization, exiting last year, we were at 68%. Last quarter, we're at 83%. So you can see how quickly we've taken that utilization up. every point of utilization is 25 to 30 basis points of gross margin improvement just 2 quarters later, right? So you saw our margins step up in Q2. We guided a significant step-up in Q3. I expect more because of the utilization tailwind. I expect more in Q4. And based on the visibility, we're getting much better visibility than we were a year ago from our customers. So we got good visibility into '27. In some cases, we have customers even starting to layer in backlog into '28. So it gives us that confidence that utilization will continue to improve. Now we will get over that hump, as Hassane said kind of that cycle time, that fab cycle time. But I expect further gross margin improvement into next year as well.

The one thing that we've had as a headwind is the input cost to hit the P&L where the pricing hasn't yet. So we did our first round of price increase April 1. We're doing a second round now. That will take several quarters for it to fully layer in, but that's a nice tailwind kind of in the short term. Longer term -- well, let me back up to Q2. Q2 had 650 basis points of underutilization charges. So if you get from that 83 to 92, 93, there's 650 basis points right there if you just do the math that I was giving you. So you've got that as a tailwind. You've got the fab right initiatives. So we've said that's about 200 basis points of gross margin improvement. We announced last quarter the divestiture of 2 manufacturing sites. That's 50 of the 200 basis points.

Some of that will start to layer in, in '27, most of it in '28. We get favorable mix, and we'll talk about the products, the differentiated products. So over a multiyear period, there's another 200 basis points of improvement there. And then if you go back to the fab divestitures that we did a few years ago, we built that bridge inventory that we're burning through. You can see we actually burned through quite a bit of that last quarter. As we start manufacturing that inside, that's another 200 basis points. So if you start doing that math, you get over 50% pretty quickly. Utilization is the biggest short-term driver though.

Great. You talked about increasing backlog. I assume like your lead times are extending, backlog is getting better. Maybe, Hassane, can you just talk about what you're seeing from a restocking perspective, specifically from your automotive customers at this point?

Yes, it's not very consistent. So we've had -- obviously, I -- last earnings -- or Q1 earnings call, I made the comment of we need to see the backlog in automotive, while we haven't seen a replenishment cycle, we haven't really seen an uptick in demand per se. SAAR has been very flat, sometimes slightly down. So overall, we haven't seen the replenishment cycle, which is the reason for concern. A couple of things. One is when demand does pick up in automotive with no replenishment, the constraint that we're seeing today will get even worse. That's point number one.

So we haven't seen that yet. And point number two is OEMs are no longer waiting for the Tier 1s. So typically, the replenishment cycle will happen through the Tier 1s placing orders ahead of an OEM demand cycle. OEMs are concerned about the fact that the Tier 1s have drawn down on their inventory because even their balance sheet can support a small inventory build. So they're buying directly from us. Now not enough to solve the potential constraint with the demand uptick, but at least there's a realization that things are not healthy in -- from an inventory perspective in the supply chain in automotive that OEMs are starting to take a little bit control of the situation.

Now that tells you the Tier 1 business model needs to change. If we need to go down a path of you have to have inventory when you have AI data center competing with the same capacity, the fungible capacity, as I mentioned earlier, that business model is going to change. I think some of the OEMs are realizing that, and they're working directly with us on direct orders. So we ship to the OEM. When the OEM has the demand, they decide which Tier 1 gets it. So they're doing the allocation.

How broad-based is that in terms of OEMs?

Not very broad-based. Obviously, the -- I'm going to call the disruptors, A lot of the Chinese OEMs, North America EVs, that's their business model. They started. We deal directly with every single one of them. So that model is kind of the new model. The traditional OEMs, I would say it's not enough, not enough to make it a trend yet. But look, I think when constraints or that challenging environment will happen with the demand, I think there will be OEMs that will get through it very nicely and OEMs that will not. And that's going to be like, hold on, what was different? Well, they bought direct and they held the inventory. And that's going to become kind of a lessons learned. I communicate as much as I can to make the lessons learned, be pre-error versus post-error, but sometimes companies want to make their own mistakes to learn, but that's not mine to judge.

So from a cycle perspective, I'm just wondering, is there anything unique and different about this cycle versus past cycles? Or as you alluded to, is this just going to be history repeats itself?

I would say I wish it was history repeating itself. At least you know what the heck is going on. I don't -- it is cyclical, but I don't think any cycle in the last, call it, 3, 4, 5 years have been anything -- I mean, you've seen the up, you've seen the down. We've all seen many ups and downs. That has a very different feel to it, not because every cycle is different, but the technology and the breadth of technology is just very unique. You don't have typically a lot of secular growth, very aggressive secular growth that are all converging on a technology. Let me give you kind of where -- and it's actually a good opportunity for us, not just today, but over a longer period of time.

It is the convergence around power. If you think about it, everything translates into gigawatts of power installed. Whether you talk about AI data center, everybody measures the overall capacity in gigawatts. If you think about automotive and the kilowatt per car translates into a gigawatt deployment in automotive, everything is measured -- the unit of measure of the secular, the same thing in industrial, SSDs, ESS, it's all measured in gigawatt deployment. The fact that every secular growth market in every end market that matters is being measured in a unit of power is unique, and it puts us in a much unique and a favorable market because that's what we do.

We do power and we do power conversion, translating that gigawatt overall into whatever end use cases. You've seen us do it in automotive very successfully and get a dominant share. And you've seen us doing it in AI data center today, and we'll continue to do that. Industrial, I think we talked about being #1 in energy storage already. That's going to continue. We talked about a 40% growth even in this environment. So we feel very good about the cycle and what it means to a technology basis and the fact that it lands in the technology domain that we are really good and strong at.

That's great. Speaking of secular growth, I think you highlighted that your data center -- AI data center business is going to more than double this year. I think that you had raised that a little bit from previously just doubling. Can you just help us understand how you're participating in the AI data center power tree, right? You've got high voltage, Stage 1, Stage 2 power. Help us understand where you're benefiting along that power tree.

Yes. So just to -- for clarity, the way we define our AI data center power revenue is revenue we generate within the walls of the AI data center. So I just briefly mentioned the energy storage systems, we put that in industrial. Although it is growing because of the deployment in AI data center, we keep that separate. So our AI data center within the walls is what's more than doubling this year. Where it is? Historically, we've come at it from the high voltage. That's kind of our pedigree. The doubling is happening from last year's 250 to this year, over 500 is actually across the power tree. Although we started at it from the high voltage, where we are today, we have gained share across the whole power tree.

The strength that we saw in the second quarter was actually across all of our content, not one piece did better than the other. And that's actually a very good sign of a broader deployment. And if you kind of consolidate the last few earnings call that we talked about, you've heard me talk about FlexPower, Delta, Lite-On, Great Wall, AWS, NVIDIA and so on. So our approach is the proliferation and the breadth of not just platforms, but breadth of customer and geographies in order to maintain that very broad exposure, so you don't see the fluctuation overall. And it's the same playbook we've had in automotive. If you recall, when we started automotive, it was a concentrated position. And over the years, I've always said, we have to have a geographical distribution and a customer deployment distribution. We've achieved that. We're doing that from the get-go in the AI data center business.

Great. I think on your most recent earnings deck, you had talked about your SAM and data center increasing from $15,000 per rack today to $115,000 per rack by 2030. Where is most of that incremental growth in the rack coming from for you?

Sure. So if I break it down, and what I would do is I break it down in high voltage and then medium and low voltage just to separate that 800-volt transition because that's what's driving the $115,000. So if I break it down, the $15,000 today is about 30% high voltage. So 1/3 of it is high voltage. That puts it about $5,000, $5,000 of content in high voltage, $10,000 of medium and low, primarily, of course, by the GPU with the SPS and so on, last stage. When you fast forward and you talk about the $115,000, it actually splits 50-50.

So the high voltage is now $55,000 or 50% of that, $55,000, while the medium and low is about the $55,000, give or take. So from a growth perspective and a dollar content, the high voltage is growing 10x, the medium and low is growing 5x. still very, very healthy, both, but there's a bigger SKU of content going into high voltage, which, again, it's where we came from as a company, and we'll continue to win share and grow in that side of it, while we continue to introduce new products, whether it's Treo based or other on the medium and low voltage.

Great. I think you also recently announced some key wins with NVIDIA on the MGX platforms and also with AWS on power supply and battery backup systems. How meaningful are these wins?

Look, I think every win in AI data center is meaningful as far as exposure to the end market. And that goes back to the breadth of the approach that we have. We want to be as broad as possible because at the end of the day, whatever the market does and however the faster deployment, people ask, well, how fast is 800-volt deployment going to be? Well, it doesn't matter what it is. We still have a very good share in the existing platform. It will be incremental and higher in the new 800 volt, but it's not like we have to wait for 800 to participate in it.

So our approach is ensure continuity and ensure we always have the highest breadth of customer and platforms, more importantly, because you have now more -- not just training, you have the inference platforms coming out. You got -- we talked about it last night, the Agentic platforms coming out. You have to have that breadth because you can't pick a site. It's all growing. And if you want to do power conversion, you have to be able to convert power regardless of the end use case.

Great. I think you've highlighted vertical GaN previously. Maybe just talk about where we stand in terms of development and ramp of vertical GaN. And then I think historically, from a technical perspective, I think vertical GaN has proven to be a very good technology, but issues historically have been just being able to scale that into volume production. Maybe talk about where you guys are at there.

Yes. So where we're at with GaN, we've sampled our high-voltage vertical GaN. So you think about it, monolithic 1,200 volts. So it's non-stack die, single die, 1,200 volts, high power. We sampled in both in AI data centers and we sampled in automotive. Quals are progressing as expected and the fab is -- I mean, we build in our own fab. So all of the big hurdles that I would say is, can you manufacture it? Is it yielding? Does it qual? Is it performing? All of these are check the box. Right now, just like any technology, we're going through the technologies, but the product is out already.

Great. Maybe switching to M&A, I wanted to ask you about the Synaptics acquisition. You obviously have had a chance to talk to quite a few investors since the acquisition was announced. Maybe just to come at it a different way, what do you think is -- based on your conversations with investors, what do you think is the most misunderstood perception about the acquisition at this point?

Yes. I think at this point, there's way less confusion than it was when we announced the deal because, one, people have had time to not just digest the deal, but also do work. And I'll explain a little bit what that work entailed. And also our communication in the last earnings call was the proof of one of the concerns that existed. So let me kind of give you at a high level, when we announced the deal, there were a few categories of investors, whether it's our investors or the Synaptics investors. But it fell into investors that are familiar with both companies, us and Synaptics today were favorable from the get-go. I say the anecdote, I got e-mails before we even got on the call to talk about the deal about the deal. So that was favorable from an awareness perspective.

Now what surprised me in hindsight, of course, it could have been differently communicated, but what surprised me is how many people were not familiar with the new Synaptics. A lot of people were anchored on Synaptics, call it, oh, what are you doing with the 5, 6 years ago, Synaptics, and none of this is true today. If anybody did the work on Synaptics based on the transformation they've gone through over the last 5 years, it's a very different company. And now that this work has been done and continues to be done, the sentiment is much more favorable on Synaptics as a company. And then the strategic intent that we talked about, there was a lot of concern at the beginning, which is kind of the bear case of, oh my God, there's some wrong with the onsemi core business.

Well, we just delivered a much better quarter than whether it's AI data center and so on. And we actually incrementally added to our position across the markets. So that basically highlighted. And of course, the margin expansion that we had this quarter and talked about it, margin expansion throughout the year. All of these are signs of a very robust core business. So it wasn't about, is the Synaptics going to overcome some weaknesses in the core? Or is one or the other, are we going to reduce focus on AI data center or automotive because the answer is we're coming at it from a position of strength. We have proven the strength of our core business, not just in the reported quarter, but in our outlook.

We have proven that it's the right asset. There's a lot of different conversations with some of my peers about even microcontroller peers about thinking about, hey, we need an AI-first compute platform. So that tells you that we actually have the right strategy to do it. A lot of our peers have compute. So that gives us that competitive edge because we're not getting a microcontroller franchise. We're getting an AI-first franchise. All of these make the strategic deal strategic.

And oh, by the way, between the synergies and really the health of the business and the margin of the Synaptics business, it comes with free cash flow that's actually going to fund the growth of the AI-first compute, the Astra platform rather than diverting R&D dollars from the core, which we're going to continue to invest in our core at the same level because we see the growth potential. So net-net, it is still a favorable deal. It is still financially favorable and strategic deal, and it does not change my view of the announcement or the deal, since the day we've done it until now, maybe the communication in hindsight, that would have been a better learning there. But from the strategic intent of the deal, it's going to deliver the value that we are here to deliver to investors.

And what I would add is it's accretive to our gross margin target, right, today. We believe we can take our scale and leverage that platform. So we can take our distribution network, our thousands of customers, and we can take that product broad very quickly, which is something they've struggled with. The other thing over time is we can think about our manufacturing footprint and say, how do we improve those margins by bringing some of those new products in-house, right, as they develop the next level of products. So accretive, cash flow positive and scaling is really what we'll do with that business.

And one thing I do want to highlight, when we announced the deal, we talked about $200 million of synergies for the deal to be accretive in 18 months. I want to highlight that this is not the extent of the synergies. We put a trigger of 18 months. Everything that Thad talked about, about the margin expansion, the manufacturing, bringing manufacturing, which is all incremental to their margin and incremental to the benefit of the combined company, all that is synergies that happen outside the 18 months.

So you can think about the $200 million is kind of at that 18-month line, but it doesn't stop at that. All of the distribution, one design cycle, you're outside the 18 months, but that's all revenue synergies. That's going to complement our growth and theirs. So that's where the 1 plus 1 is more than 2, not just for the $200 million synergy. That just gets us to an accretive deal in 18 months. It's going to continue with the scale that we bring and the technology that they bring.

Do you have a sense of right now how much of their products you're going to be able to take in-house and get those COGS benefits?

It won't be the -- like anything non-Astra. Like Astra is an advanced node. We don't do that internal. Everything else is a candidate, I would say. And I say candidate because if you have a business that's going to be replaced by a new generation next cycle from Synaptics, we may introduce the next one in and keep the older one. So there's -- we do all the technology nodes they make, we can do internal. The question is, from a cost and CapEx and so on, it has to be favorable overall. That's part of the integration planning we're doing now. But it's -- from an overlap perspective of what we can, a high percentage of the non-Astra business can go in.

Great. Looks like we're out of time. Thank you, guys.

Thank you.

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

Thank you, Josh. Good afternoon, and thank you for joining onsemi's second quarter 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 in the Investor Relations section of our website at www.onsemi.com.

A replay of this webcast, along with our second 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'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 second 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, change 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, and thank you for joining us on the call. Our second quarter results reflect the progress we have made in reshaping the business and our technology portfolio over the past several years and the strengthening demand environment. As we anticipated, the recovery continued to take shape during the quarter with continued strength in our AI data center business. We also saw multiple indicators of strengthening demand with China, BEVs in automotive, for example, and energy infrastructure and medical and industrial already showing over market growth. .

Supply is tightening in several growth areas, lead times are extending, and we are seeing increases in both orders placed within lead time and customer escalations, all signs of a healthy recovery across the board. In Q2, we delivered $1.6 billion of revenue, non-GAAP gross margin of 39.3% and non-GAAP diluted earnings per share of $0.74, all above the midpoint of our guidance. These results reflect the operating leverage in our model with recovering demand driving accelerated margin expansion and earnings growth.

AI data center remains our fastest-growing market. We now expect AI data center revenue to more than double in 2026 driven by stronger demand, further accelerated by broader customer wins and expanding content across the entire Power tree. We have expanded our role in the NVIDIA MGX ecosystem to supply advanced power systems designed to support the next generation of AI data centers, broadening the number of platforms where our intelligent power solutions are designed in. In addition, we secured 2 power supply platform wins with Great Wall, a leading provider of power solutions for China's cloud and AI infrastructure market.

In parallel, we continue to add content in U.S. hyperscalers AI deployments with design wins supporting AWS power supply and battery backup systems. These wins create additional content opportunities for our differentiated high-voltage power portfolio, including silicon carbide solutions and reflects the value of our higher power efficiency and superior power density in next-generation AI power architectures.

In 2026, we expect our silicon carbide revenue in AI data center applications to grow nearly 60% year-over-year. We expect our high-voltage revenue to accelerate as power requirements continue to rise, and system architectures evolve towards 800-volt DC distribution driving greater adoption of our intelligent power solutions from high-voltage infrastructure through low-voltage power delivery. As the only broad-based [indiscernible] power semiconductor supplier with technologies spanning the full AI Power Tree, we are uniquely positioned to support this transition from the grid all the way to the processor.

Importantly, this is not a position we earned overnight, it is the results of years of investment in solving complex power challenges, particularly in automotive, where power efficiency, thermal management, reliability and system integration have long been critical design requirements. Our opportunity extends beyond the data center into the power infrastructure required to support AI deployments. In our industrial business, we are increasingly seeing the benefits of the AI halo effect, where AI growth is driving demand across the power infrastructure required to support it, including energy storage systems or ESS.

We expect our ESS revenue to grow approximately 40% year-over-year in 2026 driven by higher year-over-year growth in North America with microgrid customers. During the quarter, we released our next-generation EliteSiC hybrid ESS module, delivering industry-leading 99.3% efficiency. We also began sampling our industry first and the world's highest power density hybrid module platform at 500 kilowatts, which increases power density by 20% compared to our previous platform, delivering growth at accretive gross margins.

Growth in AI workloads and increasing grid reliability and resilience requirements are expanding our industrial portfolio into higher-value infrastructure markets with greater semiconductor content. Turning to automotive. We continue to expand our content per vehicle through a growing portfolio of differentiated power, sensing and connectivity solutions.

In China, our automotive revenue increased 13% in the first half of '26 over the same period last year against a total vehicle sales number that was down 4% supported by expanding content per vehicle with customers like Geely Zeekr and Xiaomi. With our market share gains in China EVs, we now expect silicon carbide revenue in that market to increase between 60% and 70% year-over-year as our market share gains continue and programs ramp across existing platforms and newer vehicle launches.

In the U.S., we continue to gain share across EV disruptors with a recent example of our power content on Rivian's R2 platform, where our MOSFETs support power distribution throughout the vehicle zonal controller architecture while our silicon carbide solutions are deployed in the onboard charging system. These wins highlight our ability to participate across multiple vehicle domain as EV architectures continue to evolve. The demand of next-generation vehicle architecture around efficiency, power density and reliability increasingly mirror the challenges being addressed in AI infrastructure and energy systems enabling onsemi to leverage decades of power expertise across multiple growth markets.

A growing share of our recent design wins are coming from products introduced over the last 2 years, including our 10BASE-T1S Ethernet offering and are inductive on ultrasonic sensing products, reflecting the increasing contribution of Treo, our analog mixed-signal platform at favorable margins. by leveraging common technology building blocks across automotive, industrial and AI infrastructure applications. Treo enables faster innovation cycles and more efficient product development.

We remain on track to double the number of products sampling this year, further strengthening our pipeline and positioning us to capture additional content opportunities as vehicle architectures evolve. Over a multiyear period, we expect to outgrow underlying vehicle production through content expansion, technology leadership and share gains. More broadly, across automotive, industrial and AI data center, the industry is moving toward architectures, requiring higher level of power efficiency, power density and system intelligence all of which placed greater demands on power conversion, delivery and management.

This is what we do. As we look ahead, our confidence in the second half is grounded in the momentum we are seeing across our key growth drivers. We now expect AI data center revenue to more than double for the year. At the same time, the AI halo effect continues to create incremental growth opportunities across energy infrastructure where we expect ESS revenue to grow by approximately 40% this year. In automotive, we continue to gain content and share, particularly in China, where automotive silicon carbide revenue is expected to grow between 60% and 70%.

As I wrap up, I want to highlight our announced agreement to acquire Synaptics. Beyond the compelling strategic and financial rationale, we are excited about the opportunities this combination creates for our shareholders. Synaptics' market-leading connected compute capabilities complement our strengths in power, sensing and control at accretive gross margins. Our combination would leverage our manufacturing scale global sales channel and mass market engine to drive growth across our highly complementary portfolio.

We expect the transaction to close in mid-2027, subject to customary approvals. Let me now turn the call over to Thad to provide more details on our results and guidance for the third quarter.

Thanks, Hassane. Our second quarter results demonstrate the operating leverage in our model, with revenue up 9% year-over-year and non-GAAP earnings per share growing approximately 4x faster than revenue. Free cash flow, nearly quadrupled and non-GAAP gross margin expanded for the fourth consecutive quarter. This reflects the earnings power of our focused portfolio, the benefits of our manufacturing cost actions, and we are entering the second half of the year from a position of strength as demand continues to recover.

Our results were above the midpoint of our guidance range as we delivered revenue of $1.6 billion driven by increasing demand in AI data centers. Non-GAAP gross margin expanded 80 basis points sequentially to 39.3%, while non-GAAP earnings per share increased to $0.74. We generated $425 million of free cash flow in Q2 and returned $332 million to shareholders through share repurchases. Year-to-date, we have returned approximately 105% of free cash flow. Our ability to simultaneously invest for growth, expand profitability and return capital reflects the structural improvements in our business and differentiates onsemi today.

Turning back to revenue for the quarter. Q2 revenue was $1.6 billion, up 6% sequentially and above normal seasonality even as we completed the final $35 million of planned noncore revenue exits. Across the business, our overall book-to-bill ratio has been significantly above 1 for several quarters and continued to strengthen. Given the accelerated ramp in AI data center demand, we prioritized shipments to AI data center over automotive and industrial. We expect this to normalize as supply rebalances to match demand.

Automotive revenue was $781 million in the second quarter, down 2% quarter-over-quarter and grew 7% year-over-year. Consistent with previous years, the sequential decline was primarily driven by specific customer seasonality in Europe, offset by strength in China. Year-to-date, automotive revenue increased approximately 6% compared to 2025. Industrial revenue was $423 million, up 1% sequentially and 4% year-over-year driven by strength in our focus areas of energy infrastructure, medical and factory automation, partially offset by declines in traditional part of the industrial market.

Total revenue for the other category in the second quarter was $400 million, up 34% sequentially, anchored by stronger-than-expected AI data center demand as well as growth in other end markets. Our AI data center business continued to grow in Q2 and 2026 is now on pace to more than double compared to 2025. Looking at the second quarter split between the business units, Revenue for the Power Solutions Group, or PSG, was $829 million, an increase of 13% quarter-over-quarter and 19% year-over-year.

Revenue for the Analog and Mixed Signal Group, or AMG, was $546 million, an increase of 1% quarter-over-quarter and 2% decrease year-over-year. Revenue for the Intelligent Sensing Group, or ISG, was $229 million, a 3% decrease quarter-over-quarter and a 7% increase over the same quarter last year.

Moving to gross margin. GAAP gross margin was 38.4% and non-GAAP gross margin was 39.3%, an increase of 80 basis points sequentially. We benefited from improved manufacturing performance and favorable mix. Utilization increased to 83% from 77% as we continue to quickly ramp production to support the increasing backlog for future quarters. In Q3, we expect utilization to be flat to up. We are seeing incremental increases in input costs, primarily in raw material and external manufacturing. We are implementing a second round of price increases to offset these costs and expect to see the benefit over the next several quarters.

The announced divestitures of our Mountain Top and Philippines manufacturing facilities further advances our Fab Right strategy of exiting subscale legacy operations to improve our cost structure. We expect approximately $35 million of annualized savings with the initial benefit starting in 2027 and the full savings realized in 2028. This represents approximately 50 of the 200 basis points of gross margin improvement from our planned Fab Right initiatives.

GAAP operating expenses were $358 million, including $41 million in restructuring expenses and non-GAAP operating expenses were $297 million. GAAP operating margin for the quarter was 16.1% and non-GAAP operating margin was 20.8%. Our GAAP tax rate was 16% and non-GAAP tax rate was 15%. GAAP earnings per share was $0.56. Non-GAAP earnings per share was $0.74, a 16% increase over the prior quarter. GAAP share count was 404 million shares and non-GAAP share count was 397 million shares.

Turning to the balance sheet. Cash and short-term investments was approximately $3.9 billion, with total liquidity of $5.4 billion, including $1.5 billion undrawn on our revolver. Cash from operations was $460 million and free cash flow was $425 million. We achieved record free cash flow margin on an LTM basis of 24%. Capital expenditures were $34 million or 2.1% of revenue. Inventory declined 9 days to 192 days and flat on a dollar basis.

As expected, we continue to [ drain ] our strategic inventory, which is down 8 days. Our base inventory declined 1 day to 125 days, reflecting a healthy level of inventory supporting our expected revenue growth. Distribution inventory declined to 10.1 weeks from 10.8 weeks in Q1 with sell-through outpacing sell-in and our mass market revenue increased 20% sequentially.

Looking forward, let me provide the key elements of our non-GAAP guidance for the third quarter. As a reminder, today's press release contains a table detailing our GAAP and non-GAAP guidance. We anticipate Q3 revenue will be in the range of $1.65 billion to $1.75 billion. Our non-GAAP gross margin is expected to be between 40% and 42%, which includes share-based compensation of $8 million. This represents a significant step-up function increase as we realize the benefit of increasing utilization since the start of the year.

Given the improving demand outlook, we expect sequential gross margin expansion throughout the year. Non-GAAP operating expenses are expected to be between $303 million and $318 million, which includes share-based compensation of $33 million. Operating expenses are expected to increase at a slower pace than revenue, supporting continued operating leverage as we grow into our model. We anticipate our non-GAAP other income to be a net benefit of $18 million with our interest income exceeding interest expense.

We expect our non-GAAP tax rate to be approximately 15% and our non-GAAP share count is expected to be approximately 395 million shares. This results in non-GAAP earnings per share in the range of $0.81 to $0.93. At the midpoint, EPS growth would outpace revenue by nearly 3x. We expect capital expenditures in the range of $40 million to $50 million and we now expect capital expenditures for the year to be below 5% of revenue.

In closing, the actions we have taken to reshape the company have created a structurally stronger and more efficient business and we believe we are still in the early stages of realizing the full benefit of our model. We are entering the second half of the year from a position of strength. With a stronger demand environment, a more focused portfolio and additional manufacturing efficiencies still ahead of us, we remain confident in our ability to drive sustainable value for our shareholders. We look forward to sharing more with you during our Analyst Day in New York on September 16. With that, I'll turn the call back over to Josh to open it up for questions.

[Operator Instructions]

Our first question comes from Vivek Arya with Bank of America Securities.

Hassane, I was hoping you would give us some more color on the automotive environment. Sales were down slightly sequentially, and maybe some of it was because of exits, but how should we think about in the context of the 6% sequential you're guiding, how you expect your automotive business to do in Q3? And then what is kind of the typical seasonality in Q4? And the reason I want to ask about auto is that -- does the pricing lever apply to autos also? Because I imagine you are exposed to large OEMs and Tier 1s. So do you get the same benefit of pricing even when dealing with the automotive customers? So just commentary on demand and pricing.

The inventory is behind us. So that's what we see as true demand. Of course, regionally, automotive behaves very, very differently. I talked about some of the strength with share gains in North America. China is doing very well for us. All came in kind of where we expected. Q2 for us, if you look historically in '24 and '25, Q2 is seasonally typically a down quarter. I think the numbers for the last few years have been like 11% down and a 4% down. So Q2 is not a -- again, seasonality given a couple of key customers in Europe specifically. .

Outside of that, we see the demand environment kind of stable. We see us maintaining our content gains with new products we are introducing, whether it's the trail starting to ramp in some of the zonal architectures already or silicon carbide, which we are expecting growth with a stellar growth coming out of China, again, based on the competitive nature of the share gains we have -- I have talked about here on these calls.

So overall, we see automotive kind of, how do you say, very stable with a good outlook. As far as the pricing is concerned, pricing for us is not really market driven because the price -- the cost increases that we are seeing are, I want to call it, material in nature, material, meaning substrates or gold or a lot of it is applies regardless of market. And therefore, yes, 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.

For my follow-up, maybe one for Thad on gross margins. So Thad, the gross margins went up about 80 basis points, although I think utilization, you mentioned, went up almost 800 basis points. So is it that a bulk of that benefit you get to see in Q3? What kind of utilization should we assume for Q3? And what is the effect of mix and pricing? And I ask these questions because if I go back to the levels of revenue we saw for ON towards the end of '24, it was in this $1.7-ish billion quarterly range and your gross margins were already in the mid-40s. So I imagine that, that was a different time versus what we have. But just help us think through the effect of utilization mix and pricing for your current trajectory of gross margins?

Yes, Vivek, for the Q2 gross margin, you actually need to go back and look at the Q4 utilization because remember, there's about a 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. So we actually offset that headwind with favorable mix primarily. And we saw that coming because our guide was 39%, we came in at 39.3%, so better than we expected.

But we saw that favorable mix that we guided to. There really wasn't much of a margin impact at all from pricing because of the input cost that Hassane just walked through. So you can think about anything we did in pricing in the second quarter really didn't give a bump to the gross margin. The utilization increase now here in Q2 that we see going up will obviously impact us in the future quarters, right?

So you can think about Q2 hitting Q4. So that's why we're very confident that you'll see additional gross margin expansion through the rest of this year as utilization has been consistently going up since Q4. So as the market improves, as the utilization continues to go up as we catch up supply to demand just because demand has moved so quickly, we'll be able to see that benefit coming through the P&L for the remainder of the year.

Our next question comes from Timothy Arcuri with UBS.

Thad, I just wanted to follow up on that comment on gross -- or sorry, on utilization tailwind to gross margin. Is the right [indiscernible] still to think like 30 bps [ per point of ] utilization. So all things equal between now and Q4, the increase in utilization should drive margin up by, I don't know, 150 to 200 basis points. Is that kind of the right way to think about it?

Yes. Math is 25 to 30 basis points of gross margin improvement for every point of utilization. So as we look into Q4, yes, you should expect a margin increase, all things being equal, that's assuming a consistent mix, those types of things. Now again, we had a richer mix here in Q2. So just keep that in mind. We saw that coming. But yes, we will see additional margin expansion in Q4.

Okay. And then just with respect to the exit, so I think you exited $35 million you said in the second quarter. Can you just talk about do you still see $300 million for the full year. It sounded like you made a comment that it's done now that the exits are done. So can you just walk through all that.

Yes. The exits are done. So the $35 million was the Q2 impact. So if you take what we what we did for Q1, Q2, when you annualize it, you get to roughly about $300 million for the year because that doesn't -- obviously, those don't repeat in Q3 and Q4. The exits are behind us now. We won't be talking about that going forward. It was $35 million for the quarter, and that's it for the year. And that really, if you go back to when we map this out, it's about $900 million of annual revenue that we've exited over the last few years. So right on target to what we expected.

our next question is from Joe Quatrochi with Wells Fargo.

Yes. You talked about like prioritizing data center demand over auto industrial in the quarter. Was that any sort of impact to revenue? How do we think about that dynamic?

Yes. I mean, obviously, when we -- we have some technology specifically in power, where we have constrain. We did see some orders come in, I would say, within lead time, and we had to make priority calls. So we did shift some not just automotive specifically, but 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. So we made those calls within the quarter. You saw that strength in AI data center. We expect that AI data center, of course, to continue strength during the year. So it's not just a temporary Q2, meaning we got -- we got the game, we got the designs. We will continue to ramp and then our manufacturing output will catch up to the, call it, automotive and industrial. So overall, we made those calls within the quarter. That's the long-term beneficial for the company. And we didn't have really a customer impact in the short term. It is something that we're catching up to here in the third and fourth quarter.

And then just maybe as a follow-up. Any sort of help on just thinking about the subsegments of the business looking into 3Q on the guidance front.

Yes. As you look forward, we expect auto to be up low single digits, industrial to be relatively flat, and we expect Other which has our AI data center to be up high teens. Those are all percentage wise.

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

I guess maybe just following up on that sort of guide. Other was up $100 million sequentially. It looks like it will be up several tens of millions. But the third quarter guide, that certainly implies a pretty healthy AI data center business. I know you guys are saying it's going to more than double. But is it going to be significantly higher than the previous $500 million target you talked about last quarter? I mean how much better than $500 million do you think you can do? Certainly, it seems like if all of the strength in other in Q2, Q3 is coming from AI data center, you've got a [indiscernible] data center business with $500 million...

I'll let you run the numbers. But I mean, the fact that we started with not disclosing to doubling, now more than doubling, I would just say highlights the momentum we are gaining, which is not a surprise. We've always said AI data center is coming in exactly where our technology is most competitive, and we're going to win on the -- on the baseline of our technology, and that's what you're seeing. We're not breaking it out beyond that at this point, but we are seeing [indiscernible], we're seeing strength.

And like you said, it is sustained strength. It's not a quarterly strength. And by the way, just projecting more forward forward-looking as we get to the 800-volt DC transition, that's going to fuel more of our content. So we're excited about where we are. Our investments have delivered to the market today and our investment will continue to deliver in that market.

A follow-up question. I think in the prepared comments, you mentioned that -- I think you said it was your North American silicon carbide business for data center PSUs would be up 60% to 70%. I guess I would have thought that second carbide was one of your lead products in the data center business, which is now likely to more than double year-on-year. And so just wondering, was that comment specific to North America? Or is there a reason silicon carbide maybe growing slower than the rest of the data center business or maybe asked in a different way, what's leading that growth in data center, if it's not silicon carbide based?

Yes. I've always said, our growth in data center is literally from the wall to the core. We do not have a single technology that is an outsized across the power tree which gives us a very good distribution from what I call the high voltage because it's not only silicon carbide, MOSFETs, we have silicon carbide JFETs, and we have silicon as well. All the way to, I'd say, the SPS, which is right at the XPU or data center revenue is very, I would say, very equal across all of them.

So the growth that we are seeing in an AI data center is not necessarily anchored on the high voltage, we are gaining share and ramping close to the core as well. But all of it is growing. And those are -- by the way, those are all consistent with what we've said as far as wins that we've talked about over the last couple of quarters are now starting to ramp and contribute revenue. Silicon carbide is specifically that now silicon carbide, obviously, we've made the investment thesis on automotive. That's still winning in China, both in AI data center and automotive specifically. And my commentary is more on we're seeing that growth now in North America in PSUs and so on, where high voltage comes in. But it is not only a silicon carbide story for us in AI data center. It's really across the board. .

Our next question comes from Christopher Rolland with Susquehanna.

Yes, in regards to the AI opportunity, and I know you've had a lot of this, but it was a considerable increase in the slide deck for the AIDC TAM. I think you went from $12 billion to almost $50 billion in that number. You also talked about an expanded role in NVIDIA MGX as well as hyperscale opportunity, I believe, or battery backup at AWS. I guess, first of all, can you talk about that increase in TAM? And what, from a product basis is expanding that almost fourfold?

Yes. Yes, a couple of things. So if you look at the number, the number we're anchoring on is 2030, and the projection we are basing the increase is really correlated to I'm going to call it 1 gigawatt scale that would be installed by 2030. And if you take the installed base of power and compute that is really projected in 2030 and you backtrack and convert that to really installation of power that we need at a data center side or a rack side. and we use our content per rec, that's where the increase happens. So that's point number one is just the volume that is proportional to the gigawatt increase that we've seen. This is purely, call it, market data.

We do see the correlation with market data, and we're using that data to backfill into our content. Point number two, because that -- my second point is more on across the board, not just on AI data center, our TAM has increased, and that is really a factor of we have targeted. We have invested and we have been introducing products that we did not have last time we updated this a few years ago in our Analyst Day. And as we turn those investments into opportunities and those markets now start coming into the investments that we've made into the last couple of years, we're starting to see that increase.

Of course, it's high in the AI data center given the content growth that I talk about, a 10x on the high voltage, for example, but also our TAM is increasing across the board. You can think about vertical GaN, you can think about additional opportunities with tray. You can think about some of our silicon carbide JFET that is both finding its way in a data center, but also the industrial halo solid-state circuit breakers, solid state power disconnect and, and, and.

All of these are opportunities that did not exist even a few years ago. And when you add all of them up, that is the opportunity in front of us. and that is the investment we have already made in products that we have been delivering, and that's the next 5 years for us. So stay tuned, and we'll love to see you at Analyst Day.

I will certainly be there, Hassane. The other big change here, I think, was the EV TAM that went from like 26 to $63 billion, very interested as to what's driving that. Obviously, the silicon carbide opportunity I think maybe there was a zonal architecture commentary as well. But what else is almost doubling that EV TAM for you guys?

So you can take a look at it where before -- as you get more and more penetration of the EV and more of the acceleration of the EV, remember, we've talked about 2 things in electrification. One is EVs as a higher percent of [ SAR ]. Number two is the acceleration given the I guess the financial side of silicon carbide and the advancements we've made there that silicon carbide, which is the opportunity for us is a higher percent of penetration within the EVs from your standard silicon.

And the other one, which we've talked about here about some designs that we have won both in China and North America on the hybrid where we've always thought hybrid will remain as a silicon or IGBT. And given our competitive nature and what we've introduced and the extended range of hybrids that OEMs are looking for, that's content that we have again, within the same area that we have products for already. So that's part of our increased TAM.

And you mentioned it in addition to a lot of the Treo opportunities that we've had with 10BASE T1S, ultrasonic sensing [indiscernible] plus a lot of the onboard charging, one of which I highlighted here, which are all coming into our technology domain. So all of these, again, we took a very fresh view of where the market is and is headed given the trends and the technologies we have. And that's -- you can think about it as a bottoms-up TAM adjustment that we've done as part of our work for Analyst Day and our strategic work we have been performing to refine and deploy our strategy.

Our next question comes from Blayne Curtis with Jefferies. .

I just want to go back, I think, prior question, the growth in Other of $100 million. I just want to make sure that was a correct statement that data center was the primary driver there before you were [ giving out ] percent of revenue. I don't know if you can just dial us a little bit better. I want to make sure that, that is the source of the growth.

The AI data center was the primary driver, but the other markets were also up, so less than 100% AI data centers. But that was -- as a percentage was the highest growth in that bucket.

And then, Thad, I wanted to ask, you mentioned lead times were extending, I was wondering if you could kind of give us the context of what that means. And then I guess you're talking about prioritization, I'm kind of just curious on utilization, keeping it flat. Is it just a mix issue that you couldn't improve those deliverables? Or I'm just trying to understand -- walk us through the flat utilization.

Yes. The -- let me start with the lead time. So lead times stretched out from about 27 weeks to somewhere around 32 weeks on average. That's across the entire portfolio. We have some that are shorter, some that are longer, obviously. We did see lead times stretching out. As Hassane said, we're seeing a lot of orders inside of lead time, a lot of escalations kind of points to I guess, kind of a healthy environment demand environment, which kind of gives us that indication of the future.

And I mentioned the book-to-bill continues to improve. So we're getting better visibility even into '27 and we've got, in some situations, some customers ordering out into '28 trying to lock up supply. In terms of the utilization, look, we've had to increase utilization very sharply to reflect the increase in demand that we've seen sharply. If you think about a cycle time, a fab cycle timer all the way through from beginning of wafer to a finished good, it can be 4 to 6 months. And so you've kind of got to get that. You've got to ramp it and then you can catch up with demand. So that's where we expect that happening. Now if the demand continues to increase beyond what we're seeing, we'll continue to take that utilization up. But right now, we believe we can catch up and that's why utilization doesn't have to go up at least in the next quarter.

Our next question comes from Tom O'Malley with Barclays.

I just wanted to complete the deep dive on gross margins, I know you've gotten a bunch here. But the last remaining component there is depreciation. If you look at depreciation in the quarter, I think it was at a low for over the past 2 years plus. I just want to make sure nothing changed there. And as you look forward, obviously, you're going to see this utilization step up. But anything unexpected from a depreciation side or anything expected that we can look at September, December. I know that like you kind of trended in this [ mid-600 ] range, anything changing there just because I know you are doing a lot of these exits that should naturally come down, I would imagine? Anything is out there?

Yes. No -- yes, Tom. So we did that -- we took capacity offline about 12%, right? And so that's starting to hit the depreciation as that capacity is coming off-line. I would say the depreciation that you're seeing now is really kind of steady state at this point, right? And if you look at our CapEx, it's maintenance CapEx, I said that's going to be below our 5% target for this year. I think our target over multiple years is kind of in that mid-single-digit percentage range, but we're keeping it tight this year, and it's primarily maintenance. So no, no change to depreciation from kind of what you're seeing is a steady state right now.

And then just one, if I could sneak it in. On the disti side. I saw it stepped up a little bit traditionally. You see disti kind of aligned with China. So I saw that step up as well. Is that the right way to think about it? Is that more auto or industrial related? Any color on that step-up in disit would be helpful.

So the mass market actually increased 20% quarter-over-quarter. So you can think about a lot of that mass market tends to be industrial. There is some automotive in there. But it's -- I wouldn't call anything other than the mass market, and that's a good leading indicator, right? So we've been investing in putting inventory into the channel to satisfy that mass market. We're now seeing that happen with a 20% sequential growth in that revenue. .

Our next question comes from Tore Svanberg with Stifel.

Just had a follow-up on some of these capacity utilization questions, Pat. So obviously, Fab Right strategy makes a lot of sense. But it sounds like you do have some delinquencies. So I'm just curious like why wouldn't you ramp the capacity utilization faster? And if you do get continued upside orders here, how much flexibility do you have with your external partners to keep running capacity?

You cut out for like a few seconds in the middle, but I think I caught into how would we resize divestitures with increasing demand that capture...?

No, I was asking how much flexibility do you have with your external partners to ramp more capacity?

Yes. So external, obviously, everything is constrained, whether it's internal or external. When it comes to short lead time, we believe we have a good capacity and good allocation coming from the outside. The issue is not really capacity of what we can support as far as capacity or MAX revenue, it is how quickly the demand came in.

We can service a lot of demand from [ die bank ], but at some point, like Thad said, when we started a wafer today for an order that we got within the quarter that we didn't anticipate you have a short-term allocation we have to deal with. That's both internal and external, even if you have the capacity secured is how quickly you are able to get to the capacity. So we feel comfortable about external supply. We're not fighting for a lot of the advanced nodes like on the compute side.

Our capacity is well understood. A lot of our capacity is also internal. We still do over 60% on internal manufacturing at onSemi,Even with the divestiture. So all of these, put together, put us in a good place and that's what Thad said, it's a short term where we're going to catch up. If demand continues to accelerate, we'll take utilization up we're not capped out. It's just how quickly we get there. And in the short term, we just have to make these calls of prioritization until manufacturing output catches up.

Yes, not all capacity is fungible, right? So we do have some supply constraints on certain lanes. That's where we've just got to catch up with that demand, and then we believe we can service it.

Yes. That makes sense. And as my follow-up, and Hassane, you talked about the power from grid to core, you talked about the content per rack, 50,000 going eventually to 115,000. How should we think about that journey? And will it be a gradual journey? Or is there like a step function maybe by I guess, is when 800-volt and maybe by 2028, when that market really starts to take off. But yes, any more color you could add there would be really helpful.

Yes, the content -- look, a rack that is 800-volt DC rack with the back plane at 800-volt is a step function from a prior rack. You're not going to see that as far as revenue step function because remember, you have a build-out that's going to happen. So as these racks start to get deployed into newer data centers and whether older data centers will come in and how quickly they will retrofit and so on, so we model that into a gradual but a very healthy growth trajectory or slope, if you will. .

But it's not going to be just a step function, but it is going to be a very aggressive longer-term growth that we see. And what you said is right. You can think about it as starting whatever people believe there's kind of a range that I give end of '27, beginning at '28, give or take a quarter, but that's kind of where it's going to start ramping and the mature somewhere depending on the build-out of the data center. So that's how we are looking at it from the time, but we're already starting to see some platform. That's where the design is. So it kind of starting to look like the content is justified the way we model it. And our content in those -- you heard me talk about vertical GaN, JFET and so on, so you're starting to see a lot of that content really solve density and efficiency problems in these new architectures.

Our next question comes from Jim Schneider with Goldman Sachs.

In light of all the metrics you cited around lead times exciting and everything else in terms of expedites. And normally, at this point, I would have thought you would see OEM customers inventory start to expand or customers taking a little more risk on their own balance sheet. Is that something you're seeing yet at this point in the cycle or not quite yet in terms of absolute dollars or in terms of days?

No. I mean, obviously, I can't speak to our -- for our customers because that's -- unless they publicly talk about it. But we're not seeing -- from our perspective, we're not seeing inventory build. We are seeing really consumption to demand, and that's why you see it. And specifically, of course, in auto and industrial, we do believe we are shipping to end demand.

And there are technologies where you would see that is where it's constrained and we're making a lot of the hard decisions which is by the way of saying anything we've done back in COVID, where we decided this quarter to take inventory or days of inventory down in the channel. So we have very close control of potential inventory build. So we're very disciplined about this. We're excited about the signals in the market that I quoted. We're excited about the opportunity in AI data center. But we are maintaining a very disciplined and process-based KPI-based approach to our manufacturing and our deployment of resources.

So we don't get ahead of it. By the way, you see that in our inventory position and drain and so on across the board. All [indiscernible] show a disciplined approach even in a backdrop of a strong market or a stronger market.

That makes sense. And then just in terms of the input cost increases you talked about, you mentioned increasing price to offset those input costs over the coming quarters. As you look into, for example, 2027, what are your suppliers telling you further potential input cost increases? And maybe handicap your level of -- your level of confidence in staying ahead of those in terms of pricing or all significantly ahead of this.

Yes. So obviously, we have a very broad range. We have some suppliers where we have long-term views, and we give long-term visibility, and we have long-term visibility for potential increases that is coming. What I would say, the only consistent message I can say here is, it's not going down. And given the fact that it's not going down, we are anticipating to make sure our business also reflects that weather from now because a lot of them will be effective in or telegraphing that in '27, we're not going to have any reductions or annual reduction and so on. .

So not a one size fits all. I would say we have visibility on where we're landing for '27, and we'll get more and more clarity as we get closer to that. But we have started these discussions, and I can tell you, nothing is coming down. And therefore, I'm not expecting a softer pricing environment in '27 either.

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

Utilization in the low 80s, how do you think that compares to some of your direct competitors? And if we sort of continue to get into a more supply-constrained environment, do you anticipate that you'd be able to take share given where you're sitting with capacity?

Yes. Joe, look, I don't want to comment about our competitors. I can tell you what we're doing in our business, right? Again, we've taken this utilization up quick in response to this app back in demand. For us, getting to kind of in that low 90% -- 92%, 93% is fully utilized. Once we get there, we start flexing to the outside. So there's a certain amount of our products today that we're manufacturing inside that we can take to the outside.

So I don't think we're going to be limited for us to really start to get to a point where we even think about getting capped out, revenue is still 25%, 30% higher than the run rate today. So we're not worried about that given our flexibility with our fab right and our ability to flex inside and outside.

And look, the focus for our growth and our new product introduction, think about Treo, for example, that investment in capacity is done. It's in East Fishkill. East fiscal is not fully utilized. So we have the runway to ramp. So it's not like Thad said earlier, not everything is fungible, but the areas where we have growth and the areas we've invested in those areas where we have runway, and we will continue to ramp aggressively across all markets.

That's helpful. And then in terms of things getting tighter, starting to see some constraints. Are there any specific areas that are more impacted than others? Any hotspots is silicon carbide different than everything else? Just any sense of where supply demand might be different.

I think if you think about it across power, and it's not just high voltage because a lot of the, for example, data center is consuming power, not just in the high voltage. I mentioned earlier, we're ramping everything from the wall all the way to the XPU, and that is high voltage all the way to low voltage, and we see constraints in some of those lanes. .

We have 1 of the most efficient power products out there. So we're getting an outsized and we're running in multiple fabs now. So we're increasing our capacity and our flexibility to be able to service it but that we are -- those lead times have extended, and we are working with customers on supporting it. We will win share where others cannot.

But that's not how we're winning. We're winning because really the product is superior because if it's a multisource product, you can imagine the margin is not as exciting, and that's not a business we play in. That's the business we actually exited. So we are winning where our products provide a differentiation to our end customers, and that's what's consistent. You see that in silicon carbide. I called out China specifically, given that I keep talking about we always win across the board based on efficiencies and product. You see that in China, you see it in North America, and you've seen it in Europe. That's our focus, that's our investment, and that's how the margin expansion will continue.

Our next question comes from Vijay Rakesh with Mizuho.

Just a quick question. On the AI data center side, I saw that $48 billion TAM, big increase in that opportunity there. Is there a way to look at it, how that -- how your content breaks out between site power, the power in the rack and the compute rack as you book out like what's the split of opportunity set within that?

Yes, I'm going to give you an approximate. And approximately, if you look at the numbers we've given as far as content per rack and you think about high voltage, which I would put the first order in the side card going to 50% of the total -- $115,000 of content, 50% of it is high-voltage; 50% is medium and low voltage. That gives you that split 50-50.

Today, on the $15,000 of content, that split between high voltage and then the rest is 70-30. 30% is high voltage, 70% is medium to low. So the increase from a dollar content is on the high-voltage side, but both are going up. One is going up 10, one is going up like 5 to 6x. So both increasing, but an outsized increase is, of course, in the high voltage given the market trend we are talking about.

And then on the -- you look at the auto, industrial and data center, the -- is there a way to look at how the order trends are by the different geographies? Like what are you seeing in U.S. versus Europe versus China, I guess .

Yes. I think if I take it in order automotive specifically... .

Or all 3.

All 3, okay. It's like very, very different. All 3. So I would say automotive, I'll just rank order. In auto, it's China, U.S., Europe; industrial, I would say, China, U.S., Europe; and AI data center is really U.S. and some China that I talked about with Great wall on this call is starting for us as well, but primarily in the U.S. In Europe, you have, of course, the AI halo that I call out within our industrial business, not on AI data center, but it is an AI halo that's supporting it. I think that's kind of how I can think about it.

I would now like to turn the call back over to Hassane El-Khoury, President and CEO, for closing remarks.

Thank you all for joining us today. Before we close, I'd like to recognize our employees around the world for their dedication, innovation and execution. The momentum we are seeing across our business, the opportunities ahead of us and our confidence in the future are all made possible by their hard work and commitment. On behalf of the leadership team, thank you for everything you do to serve our customers and move onsemi forward.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

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.