Q1 2026 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the ON Semiconductor Corporation First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session.

To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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.

Good afternoon, and thank you for joining ON Semiconductor Corporation’s first 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 on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast, along with our first quarter earnings release, will be available on our website approximately one hour following this conference call, and the recorded webcast will be available for approximately 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 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-Q, 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 El-Khoury: 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 Semiconductor Corporation. Improving demand signals, accelerating AI data center growth, and sustained gross margin expansion demonstrate 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 2.5 times 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 include zonal architectures built on 10BASE-T1S paired with smart FETs; auto ADAS park-assist systems using ultrasonic sensing; power management for AI client platforms; and inductive position sensing for humanoids and advanced automation use cases. These wins reinforce Treo’s penetration as customers move to a more centralized compute model with zonal for a scalable software architecture and require a faster time to market. Our Treo-based driver ICs and inductive position 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 2026. With a balanced model that combines internal GaN development and foundry partnerships, we have a differentiated roadmap 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 Treo-based T1S Ethernet solutions for a leading North American customer’s next-generation zonal architecture. The platform integrates more than 30 Treo devices enabling end-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 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 EV platforms, enabling fast 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 NIO 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 Semiconductor Corporation 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 broader adoption across the PowerTree 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 Semiconductor Corporation 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, protection and control, and system-level integration from the grid to the processor. As policymakers push for greater transparency in U.S. data center energy use, it reinforces a trend we have been aligned with for some time. ON Semiconductor Corporation’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 FlexPower, 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 large U.S. OEMs’ microgrid deployment. Our announcement with Sungrow Electric highlights our hybrid power integrated modules combining EliteSiC technology and FS7 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 win 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 roadmap spans complementary modalities including high-resolution imaging, depth, and other sensing approaches like SWIR 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 FabRight 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 will now turn it over to Thad to give you more details on our results and guidance for the second quarter.

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. 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 non-core exits in the quarter. Turning to the end markets, automotive revenue was $797 million in the first quarter, roughly flat quarter over quarter and up nearly 5% year over year, marking the first year-over-year growth after seven quarters of decline. We continue to see stabilization in the automotive market and we now believe we are 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 PowerTree. 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, an increase of 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 (PSG) was $737 million, an increase of 2% quarter over quarter and 14% year over year. Revenue for the Analog and Mixed-Signal Group (AMG) was $540 million, a decrease of 3% quarter over quarter and 5% year over year. Revenue for the Intelligent Sensing Group (ISG) was $256 million, a 5% decrease quarter over quarter and a 1% increase over the same quarter 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% 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 FabRight 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 our non-GAAP tax rate was 15%.

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 $60.54. Turning to the balance sheet, cash and short-term investments were approximately $2.44 billion, with 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 as we continue to deplete the 75 days of strategic inventory, which is down from 76 days in Q4. We plan to deplete this inventory over the next two years. Excluding the strategic builds, 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 Q2 2026. 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 non-core 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 194 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 would like to turn the call back over to the operator to open it up for questions.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Our first question comes from Ross Clark Seymore with Deutsche Bank. Your line is open.

Hi, guys. Thanks for letting me ask a question. I guess for my first one, Hassane, one for you. Cyclical conditions are clearly getting better, but I think the structural and secular stuff is more important to investors when they think about ON Semiconductor Corporation.

You rattled off a bunch in your preamble, whether it be the AI data center, the electric grid, the zonal. There is 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? And as my follow-up, a good segue to the gross margin side for Thad.

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? 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?

Hassane El-Khoury: Yes. I will take them one at a time. If you think about the AI data center, you are already seeing it in 2026. If you recall, we entered the year thinking we were going to be in the high-teens sequential growth for AI data center. We ended up at 30%. You see the strength is starting already to come in, and for the year, doubling our revenue from last year. So that is going to be a top-line growth driver. For the zonal, the 10BASE-T1S, and so on, that is all really related to the Treo traction that we have been talking about. That is already being seen in the revenue with the 2.5x increase that I talked about, but more importantly, that is going to start showing up in the top line as we progress in ’26, ’27, ’28 towards that $1 billion in 2030. More importantly, it is 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. You can think about it as both a top-line driver and a gross margin driver. That is going to be both in the AI data center and automotive with the zonal. Then other opportunities, as they progress for the AI halo effect that I talked about, you will see that in the industrial business. I already talked about that side of the business growing 40% year on year. As the rest of industrial starts to grow, you are going to start seeing that as a reflection of our overall industrial business. 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. Even in ’26, Thad in his prepared remarks talked about margin expansion throughout 2026. So you are going to already start to see that shift, and that is all a lot of the portfolio rationalization and the manufacturing work that we have been doing starting to reflect.

Yes, look, we expect expansion throughout the year as we are seeing the favorability from our FabRight activities that we have been taking through 2025. As utilization improves, you will see that as well. We have also had some headwinds on input costs going up, and our pricing actions are now going to offset that as we think about later in this year. The puts and takes are similar to what we have talked about in the past. It is utilization, where every point of utilization is 25 to 30 basis points of gross margin improvement.

We think longer term there is another 200 basis points of improvement from the FabRight initiatives that we are driving. Hassane just talked about favorable mix, and longer term you are going to see over 200 basis points impact to gross margin there. We divested the fabs back in 2022. I do not think we are going to see that here in ’26, but in ’27 you should start to see some impact from that, and longer term that is another 200 basis points. When you start to stack it up, you can get over 50% when you do the math.

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. Your line is open.

Thanks for taking my question. 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. Do you think this year’s second half plays out differently than what we saw last year? What are you seeing in your customer discussions and demand visibility?

Because you mentioned a lot of positive words, demand inflection and demand strengthening. Should we be expecting seasonal or better-than-seasonal trends in the second half? How should we think about the second half of this year?

Hassane El-Khoury: I do not want to guide the outlook from a seasonality perspective, but let me give you how the year is laying out. The signals that I look at, whether it is book-to-bill, order patterns, lead times, etc., are all pointing in the right direction. We are expecting the second half to outgrow the first half. I am not talking about flattish; I am talking about a good outlook that we have based on all the customers. It is driven by programs that we started ramping already and will continue to ramp. You can think about it as we have gotten one quarter and then we are going to get the rest of the quarters as the ramp happens. Whether it is AI data center or automotive, driven primarily in China, those models that I referenced with 55% being ON Semiconductor Corporation silicon carbide just got released and will be in production in the second half. You can start seeing a lot of the leading indicators of a solid ordering pattern, and you can extend that to AI data center and 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. 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 it grew 30% sequentially. How big is it for ON Semiconductor Corporation right now? Is it something like mid-single-digit percent of sales?

There is 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? Thank you.

Hassane El-Khoury: Let me first tackle the first one. Last year, we talked about $250 million in AI revenue. We just mentioned that we will be doubling that this year. That is pretty healthy growth given where we started. We have all the power technologies from the wall 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 industrial. From a technology perspective, I feel very good. We have done some inorganic acquisitions in 2025 that are playing to our advantage. We talked about the Aurasemi acquisition, and we did the 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. Treo is also a very big internal technology for the AI data center. Those together cover the technology. From a team perspective, you have seen our actions on OpEx, but both Thad and I have always said we are very focused on capital and R&D allocation in the areas of growth. That is where they are going. 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 Analyst with Needham & Company, on behalf of Nathaniel Quinn Bolton. Your line is open.

Thank you for letting me ask the question. You talked about addressing the full AI data center power tree, from energy infrastructure, UPS, rack-level power, and point of load. As architectures move towards higher-voltage distribution, how should we think about the biggest incremental content opportunities for ON Semiconductor Corporation? Is the larger dollar opportunity still outside and at the rack, or is the VCORE point-of-load side becoming a more material contributor?

And then I have a follow-up. Thank you.

Hassane El-Khoury: If you think about it from the rack or 800-volt or HVDC all the way to the outlet, there are 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 solid-state transformers as well. That is forward-looking and incremental to the opportunity we have today. To break it down, there is 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 cannot forget that today, at the rack, you can think about a 120-kilowatt rack at roughly $9,500 of content. At the 800-volt or high-voltage rack, we are thinking about roughly $115,000 of content. So although our content is almost 10x inside the rack, there is additional incremental content from the rack all the way to the grid that we also participate in, because this is all high voltage, which is exactly in our sweet spot.

Great, thanks. And then, you noted the company has moved beyond the cyclical trough for automotive, with inventory digestion largely behind you. As automotive begins to recover, how much of the improvement are you seeing is true unit demand normalization versus content growth from things like image sensors and zonal architectures? And beyond China, are you seeing any meaningful differences by region?

Thanks.

Hassane El-Khoury: Let me answer the regional question first. Obviously, very healthy automotive in China, followed by North America, followed by Europe if you think about it from a recovery and health standpoint. As far as your question about content, we absolutely leverage more content than SAAR. If you look at the global SAAR, it is flat, maybe slightly down or slightly up depending on the outlook you look at. To give you an example, in China specifically, Q1 is seasonally down. The number of passenger vehicles 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. We are both gaining share and gaining more and more content. I talked about 10BASE-T1S for zonal with an OEM in North America. That is net new content that did not exist about a year ago because zonal is new and Ethernet-based is new. That is content that we are adding to an existing SAAR as vehicles upgrade to a software-defined vehicle. We are more leveraged to content than SAAR, and in certain areas, we are gaining share.

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

Hey, thanks for taking my question. Maybe following up on some of the previous ones about data center. When 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 we 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?

Thank you.

Hassane El-Khoury: We are not breaking it down to that level by product family, but I will tell you it is everywhere from low voltage all the way through high voltage. That includes mixed-signal analog on the GPU or XPU side—low voltage but high power—along with silicon carbide and silicon carbide JFET, and of course our medium- and high-voltage silicon anywhere in between. We keep focusing on ON Semiconductor Corporation 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 applications with FlexPower. That gives you an indication of the breadth of our approach. It is not just tied to a single XPU. It is with ASIC vendors as well as hyperscalers. The breadth is what we are leveraging. That is where the growth came in better than we expected as they proliferate, and why the 2026 outlook is to double.

Thank you for the color there. And then for a follow-up, I think entering the year, you gave us a sort of growth algorithm of taking whatever we think for the industry growth and subtracting 5% for the business exits. Is that still the right way to think about it? 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 did not react as you expected them to.

Any risk of that happening again this year, or has anything changed with that old growth algorithm overall? Thank you.

Josh, no change. As I said, we have exited approximately $50 million in Q1. There is another $30 million to $40 million here in Q2. If you annualize that, you roughly get to the $300 million that we planned on exiting. So we are done in 2026. Your algorithm is still true: take the market growth rate, take 5% off, and that would be our comparable. We have line of sight to that, and we are executing to those exits.

I do not plan on that changing for the rest of this year.

Our next question comes from Vijay Raghavan Rakesh with Mizuho. Your line is open.

Yes, hi. Thanks. Just a quick question on auto and industrial. Can you talk about how you see that progressing in June and into the back half?

Let me give the end-market view for Q2. Automotive in Q2 we think will be roughly flat. As I said, we think we are shipping to natural demand. We have not seen the full recovery or the replenishment cycle in automotive yet. If that were to happen later in the year, that would be a good thing.

For our industrial business, we are looking up mid-single-digit percentage-wise. That will be driven by the broad industrial, our traditional market that has been growing the last two quarters sequentially. And our Other market, which includes our AI data center, will be up mid-teens 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 utilization improving? And are there any exits that are still left in the core business? Thank you.

There will not be further exits beyond ’26. On utilization, we are at 77%. We took utilization up quickly within the quarter to support the strong demand signals that we were getting, which is a good sign. If the market continues to recover, we will see some slight improvement over time. We are going to match our utilization to whatever the demand signal is for the remainder of this year.

Utilization is the biggest factor in driving gross margin expansion, and that is why we are comfortable with incremental expansion through the remainder of the year.

Our next question comes from Gary Wade Mobley with Loop Capital. Your line is open.

Hi, guys. Thanks for taking my question. Congratulations on the upturn in the cycle and the secular drivers as well. I wanted to ask about utilization.

I assume it is going to be trending above 80% broadly across all your manufacturing assets exiting 2026. At what point do you need to take up your capital intensity above the 5% level you have been running at for a while now to support the growth in 2027 and 2028?

Gary, I do not anticipate any change to our capital intensity. I expect it to be in the mid-single-digit percentage of revenue for the foreseeable future, and that goes into 2027 as well. To get to fully utilized for us, which is just over 90%—call it low nineties—we would need revenue that is 25% to 30% higher than where we are today. Once we hit that, we start flexing to the outside as well.

We actually have a lot of capacity here, and that is why, as we sit here today, we do not look at having to bring on capacity.

Hassane El-Khoury: Just to give you an example, Treo is already ramping out of East Fishkill. That investment was made a few years ago. A lot of the investment we have made over the past two to three years is to build the capacity that we need for the new products that are ramping today, like Treo, the AI data center for silicon carbide, or the JFET, etc. It is not about adding more capacity. It is about utilizing capacity we already invested in, and that is the leverage in our model with the fall-through at mid-single-digit CapEx.

Actually helpful. Thanks, guys. And for my follow-up, I want to ask about pricing. You did mention passing along some inflationary pressures in your supply chain onto your customers. How pervasive are those pressures? Or asked differently, how pervasive are your pricing adjustments as we look forward over the next few quarters?

Hassane El-Khoury: I would say a couple of things. Coming into the year, the pricing environment is better than we anticipated. There are commodities and energy costs that we are passing to customers as a matter of fact. In areas where we are fully constrained, those are more surgical based on the technologies that we are constrained on. It is not a one-size-fits-all. It is either a material cost offset or an allocation methodology that comes with the pricing adjustment. Those are more surgical than broad.

We are already seeing the impact of input costs being higher in the P&L, although we are not seeing the impact of the higher pricing yet. It just takes a while for that to become effective and hit the P&L. In the second half, we think you will start to see that pricing impact show through on the margin line.

Our next question comes from Christopher Rolland with Susquehanna. Your line is open.

Thanks 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 it something else? And when you say the chip guys, are you talking about GPUs or merchant XPUs? Any other details here would be great.

Hassane El-Khoury: Let me give you what our wins are and what the reference is for. The reference is across the XPU—whether it is GPU or CPU—the power delivery right at the GPU or XPU, in whatever form that is required, whether it is an SPS or anything else. Then if you keep going outside from that point, you go to the rest of the rack where you have the medium- and high-voltage discrete FETs and integrated analog mixed signal. When you get more on the power boxes, whether it is the UPS and so on, like I mentioned with Flex, FlexPower, those are across a multitude of technologies that we offer, whether it is silicon carbide MOSFET or silicon carbide JFET. 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 outside of the rack. It is across the board. We do not break it out by which one. It is across the PowerTree because of our broad portfolio. One more thing: when I talk about hyperscalers, a lot of it is in the power domain. In the power domain, a power rack or a UPS is architecturally defined with the hyperscaler. We work with the likes of FlexPower across all hyperscalers, but it is architecturally defined with the hyperscaler. That gives you 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 are seeing geographically and if there are any differences in the recovery?

Hassane El-Khoury: It depends on the market and the geography. Automotive shows strength in China. We have industrial AI strength in North America. These days it is hard to talk about regional without talking about market specifics that drive the regions. It is more market-dependent. In Europe, the automotive market has not really recovered, so you can think about it as going sideways, and that matches what our customers, the OEMs, have been reporting. Industrial is better than we expected. In North America, AI is strong. Auto is better than we expected with certain names in North America. Industrial is doing well and starting the recovery. Looking forward, we are resuming aggressive growth in energy storage and renewable energy in industrial with 40% growth. That is going to be fueling the second half of the year as that comes back to recovery, primarily in North America and China.

Tom, your line is open.

Hey, guys. Thanks for taking my question. I wanted to ask about the channel. The channel was flat into the quarter.

When you look into the second half of the year, you are seeing some more robust trends in your business. Can you talk about your appetite to potentially expand the channel? And then the second one, around the direct customers, there was a time during the pandemic where we went from just-in-time to just-in-case. It feels like you have moved away from that as inventory has burned down.

As you are seeing a recovery, are you seeing customers move more towards building backup inventory, or do you see that being something that you are going to have to carry on your balance sheet in the future? Thank you.

On the channel, we have been running nine to eleven weeks in our sweet spot. We were at 10.8 weeks last quarter, consistent with Q4. I expect it to remain at this level. The good news is we have been investing in inventory in the channel. We took it up early last year for the mass market, and what we have seen is that mass market revenue going through distribution grew quarter on quarter and year on year, and that is what we want to see.

As a reminder, about half of the business through the distribution channel is fulfillment where we own that customer. We focus on where the distributors do demand creation, and we are seeing growth there. As we go through the year, we will watch the demand signals and match that. If it goes up, it is because we have to seed that market for a future revenue ramp.

You have to have that inventory sitting out there. Right now, line of sight is to keep it in the ten to eleven weeks range.

Hassane El-Khoury: As far as just-in-time versus just-in-case, at the end of the day, if you do not place your orders with enough visibility, you are not going to get your order. Some technologies are already on allocation. Automotive has not seen a recovery yet. Technology is technology, whether it goes in AI data center or automotive. We have been pushing for getting the backlog. Backlog is starting to layer in, and lead times are starting to extend. It is irrelevant what model the industry lands at. We are 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. That is our view of just-in-time and just-in-case.

Our next question comes from Joseph Moore with Morgan Stanley. Your line is open.

Yeah, on the same lines, are you seeing any kind of lead time extensions or hotspots? And at our conference, you had talked about the automotive OEMs looking to take on some inventory because the tier ones were not. Anything around that and any anxiety that you see around the inventory situation?

Our lead times have stretched slightly. In Q4, we were around 23 weeks. In Q1, we are about 26 weeks. So it has gone out just slightly, and that is across the board on average.

We are seeing a number of orders coming in inside of lead time and expedites. I think that is this market recovering faster than many had expected. Thus we took utilization up quickly, trying to match that as fast as we can. I will let Hassane comment on the inventory.

Hassane El-Khoury: Some of the OEMs are starting to do directed or direct semiconductor sourcing. Whether they hold inventory or we have an agreement with them at a cost associated with it will be an operational decision. The anxiety is there. I am starting to get calls. We are on allocation in certain technologies. The strength is not yet shown in automotive, but it will come, and it will come with even stronger allocation in the automotive market given that AI data center has been showing a ton of strength.

Thank you. Our next question comes from James Edward Schneider with Goldman Sachs. Your line is open.

Good evening. Thanks for taking my question. Maybe related to the last one, I was wondering if you could broadly characterize your customers’ willingness 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? Thank you.

Hassane El-Khoury: I do not think you are already seeing that. In AI data center, there is no inventory; it is all going to end build-out. In industrial, it is a ramp. We can see the deployments, whether it is energy storage systems or standard industrial. That is not an inventory build; that is actual end-demand recovering. In automotive, as Thad talked about, we are shipping to natural demand. I do not believe there is inventory being built out. How they protect from shortages that we know are coming is a question for them—whether they want to put it on their balance sheet or wait in line. We will see how that plays out when automotive starts to show a little bit more strength.

Thanks. And then just as a follow-up about capital allocation, you have done a very good job of opportunistically buying back shares when the stock price is low. With the stock price having recovered quite nicely, how are you thinking about the calculus for incremental buybacks versus other things to do with the capital? Thank you.

Just as a reminder, capital allocation is after investing in our business—after making the R&D investments and the CapEx. We have 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 when we think there is a dislocation. As I noted, we were buying last quarter at an average share price of $60.54, so you saw us flex up. 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. Your line is open.

For a while now, you have been giving us metrics on customer comps in your mass market business. It has been a good leading indicator of cyclical improvement dynamics. I recall a discussion a couple quarters ago—you reiterated today that mass market is roughly 25% of your distribution business, small to medium-sized customers. Your distribution business was strong this quarter, almost up 24% to 25% year over year.

How much of this was mass market strength? And then for the mass market, are you targeting Treo for more general-purpose catalog for some of these customers as well?

The mass market, as highlighted earlier, was up quarter on quarter and year on year—about 35% growth. That is accelerating. A few quarters ago, we said it was about 30% growth. You can see that acceleration as we have been seeding the distribution channel with the right inventory for that mass market.

Hassane El-Khoury: For Treo, absolutely. Treo is a very versatile platform. It is an analog mixed-signal platform upon which we build a lot of solutions and products. These are all application-specific products that are definitely for the mass market. We do not make ASICs or custom chips. We make chips to solve specific problems for customers, and we deploy those in the mass market through our distribution channel and network. So, absolutely, Treo is part of our broad mass market push.

I appreciate that. During the downturn and stabilization period last year, you focused on building your portfolio across your power and mixed-signal analog portfolios. Two of those acquisitions—VCORE controllers and vertical GaN from NextGen—were targeted to have products into the market in the first half of this year for VCORE and sampling of your vertical GaN products. Is the team executing to this?

And with VCORE, there is a sizable market opportunity, especially on the CPU side where we see new server CPU SKUs. Is the team seeing strong interest for your new multiphase controller and regulator products?

Hassane El-Khoury: One hundred percent. We are fully focused on it. We have a dedicated team covering that not just from a go-to-market perspective, but from a product perspective as well. There is complete focus on it. It is a very large opportunity, and it is the same focus that we have across the company across the whole power tree. At the GPU level or on the board or blade level, there is a focus across all technologies. The vertical GaN is more on the high voltage. We are sampling vertical GaN and we are on track to continue to do that, with revenue starting in ’27. That is still on track as discussed previously.

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.

Hassane El-Khoury: Thank you for joining us on the call. Before we close, I would like to recognize the extraordinary efforts of our global teams. Over the past several quarters, they have navigated one 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 have positioned ON Semiconductor Corporation to deliver consistently today and to perform even more strongly as conditions continue to improve. Thank you.

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