ON Semiconductor (ON) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call reveals mixed signals: strong past performance with revenue and EPS exceeding expectations, but guidance indicates lower margins and operating expenses. Positive developments include a new automotive partnership and increased share buybacks. However, the Q&A highlighted uncertainties in market recovery and potential revenue headwinds. The lack of clear guidance on certain aspects and stable pricing environment contribute to a neutral outlook. With no market cap data, the prediction remains neutral, assuming balanced positive and negative factors.

Key Financial Performance

Q2 revenue $1.47 billion, increasing 1.6% over Q1. Reasons: Exceeded midpoint of guidance, driven by stabilization across end markets.

Automotive revenue $733 million, decreased 4% sequentially. Reasons: Weakness in America and Europe, offset by strength in China.

Industrial revenue $406 million, increased 2% sequentially. Reasons: Growth in medical and aerospace/defense businesses, slight decline in traditional industrial.

Other businesses revenue Increased 16% quarter-over-quarter. Reasons: Significant contribution from AI data center.

Power Solutions Group (PSG) revenue $698 million, increased 8% quarter-over-quarter, decreased 16% year-over-year. Reasons: Not specified.

Analog and Mixed-Signal Group (AMG) revenue $556 million, decreased 2% quarter-over-quarter, decreased 14% year-over-year. Reasons: Not specified.

Intelligent Sensing Group (ISG) revenue $215 million, decreased 8% quarter-over-quarter, decreased 15% year-over-year. Reasons: Not specified.

Non-GAAP gross margin 37.6%, above midpoint of guidance. Reasons: Structural changes and disciplined cost management.

GAAP operating expenses $359 million, decreased from $396 million in Q2 2024. Reasons: Benefits from structural changes and reduced manufacturing capacity.

Non-GAAP operating expenses $298 million, decreased $17 million sequentially. Reasons: Delays in realizing full benefits of restructuring activities.

GAAP operating margin 13.2%. Reasons: Not specified.

Non-GAAP operating margin 17.3%. Reasons: Not specified.

GAAP tax rate 12.6%. Reasons: Not specified.

Non-GAAP tax rate 16%. Reasons: Not specified.

Diluted GAAP EPS $0.41, compared to $0.78 in Q2 2024. Reasons: Not specified.

Non-GAAP EPS $0.53, compared to $0.96 in Q2 2024. Reasons: Not specified.

Cash and short-term investments $2.8 billion. Reasons: Not specified.

Free cash flow $106 million. Reasons: Sequential decline driven by timing of working capital.

Capital expenditures $78 million, 5% of revenue. Reasons: Not specified.

Inventory Increased by $9 million quarter-over-quarter, decreased by 11 days to 208 days. Reasons: Includes 87 days of bridge inventory for fab transitions in silicon carbide.

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Operating Highlights

Treo platform: Momentum continues to build with a design funnel that has more than doubled quarter-over-quarter. Progressing towards a $1 billion revenue target. Shipped over 5 million units from the East Fishkill facility this year.

AI Data Center: Revenue nearly doubled year-over-year in Q2. Collaborating with NVIDIA to accelerate the shift to 800-volt DC power architecture. Sampling next-generation power technologies.

EliteSiC M3e and M4T: Integrated into Xiaomi YU7 electric SUV models and Schaeffler's traction inverter for PHEV platforms, enabling better performance and energy efficiency.

China Market: Revenue grew 23% sequentially in Q2, driven by silicon carbide and new EV ramps. Strong traction in BEV and PHEV platforms.

Automotive Market: Revenue down 4% in Q2 but expected to grow in Q3 with continued EV ramps. Expanding engagement with global OEMs and Tier 1s.

Operational Efficiencies: Reduced manufacturing capacity and restructured workforce in Q1, leading to substantial reduction in operating expenses in Q2. Non-GAAP operating expenses decreased $17 million sequentially.

Fab Right Initiative: Rationalizing portfolio and manufacturing footprint to expand gross and operating margins. Aligning capacity with higher-margin products.

Portfolio Rationalization: Exiting noncore businesses and repositioning image sensing portfolio towards higher-value segments like ADAS and machine vision.

Next-Generation Technologies: Investing in wide band gap semiconductors for transformative gains in power density, thermal performance, and energy efficiency.

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Risk or Challenges

Automotive Revenue Decline: Automotive revenue in Q2 decreased by 4% sequentially, driven by weakness in America and Europe, despite strength in China. This decline could impact the company's financial performance and growth in the automotive sector.

Manufacturing Utilization Challenges: Manufacturing utilization remained flat at 68% after capacity impairment, indicating underutilization of resources, which could affect cost efficiency and profitability.

Restructuring Delays: Delays in realizing the full benefits of restructuring activities have impacted operating expenses, which could delay cost-saving measures and operational efficiency improvements.

Legacy Product End-of-Life: Approximately 5% of 2025 revenue is expected not to repeat in 2026 due to the end-of-life of certain legacy products and noncore exits, potentially impacting revenue streams.

Inventory Management Risks: Inventory levels increased by $9 million quarter-over-quarter, with 87 days of bridge inventory for fab transitions. High inventory levels could lead to inefficiencies and increased holding costs.

Economic and Market Uncertainties: The company is operating under economic uncertainties, including potential impacts of tariffs and market stabilization challenges, which could affect demand and financial performance.

ISG Revenue Decline: Revenue for the Intelligent Sensing Group (ISG) decreased by 8% quarter-over-quarter and 15% year-over-year, indicating challenges in this segment that could impact overall revenue.

Under-Absorption Charges: Non-GAAP gross margin guidance includes 900 basis points of noncash under-absorption charges, which could negatively impact profitability.

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Guidance & Outlook

Automotive Revenue: Expected to grow in the third quarter with continued EV ramps. China remains a growth driver with strong traction in BEV and PHEV platforms. Collaboration with Schaeffler to deliver next-generation traction inverter for PHEV platforms is expected to expand adoption and diversify customer engagement.

AI Data Center Revenue: Revenue nearly doubled in Q2 over the same quarter last year. AI growth is expected to be limited by power delivery rather than compute alone. The company is actively working with leading XPU providers on smart power stages for current and next-generation platforms.

Treo Platform: Momentum continues to build with a design funnel that has more than doubled quarter-over-quarter. The company is on track to double the number of products sampling from last year and aims for a $1 billion revenue target.

Next-Generation Wide Band Gap Semiconductors: Strategic investments have delivered transformative gains in power density, thermal performance, and energy efficiency. Sampling of these new breakthrough technologies has started.

Q3 2025 Revenue Guidance: Anticipated to be in the range of $1.465 billion to $1.565 billion.

Q3 2025 Non-GAAP Gross Margin: Expected to be between 36.5% and 38.5%, including share-based compensation of $6 million.

Q3 2025 Non-GAAP Operating Expenses: Expected to be in the range of $280 million to $295 million, including share-based compensation of $32 million.

Q3 2025 Non-GAAP Earnings Per Share: Expected to be in the range of $0.54 to $0.64.

Capital Expenditures: Expected to be in the range of $35 million to $50 million for Q3 2025.

2026 Revenue Impact: Approximately 5% of 2025 revenue will not repeat due to the end of life of certain legacy products, ongoing noncore exits, and repositioning of ISG.

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Shareholder Return Plan

Share Repurchase Program: Increased 2025 targeted share repurchase to 100% of free cash flow. Executed this target by repurchasing an additional $300 million of shares in Q2. Returned 107% of free cash flow to shareholders year-to-date.

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Key Q&A

Q:What are you seeing cyclically and where are there still headwinds and tailwinds?

A:The company is seeing stabilization relative to the last 3-5 quarters, which is a positive development. Automotive hit the low end in Q2 and is expected to be up in Q3. However, there is still uncertainty, and customers are cautious. The company remains cautiously optimistic and is focusing on disciplined investments in high-value products and revenue.

Q:Why is gross margin flat to slightly down if revenues are up, and what are the key levers to reach the 53% long-term target?

A:Gross margin is flat to slightly down due to cautious inventory management and underutilization charges. Key levers to reach the 53% target include improving utilization, monetizing divested fabs, Fab Right initiatives, and ramping new products with favorable margins. Each point of utilization improvement contributes 25-30 basis points to gross margin.

Q:What drove the softer Industrial results in Q2 and the stronger Other segment?

A:Industrial was softer due to traditional industrial markets being slightly down, which is seen as bouncing across the bottom. The Other segment was stronger, driven by the AI data center business, which doubled year-over-year but remains a small part of the overall company.

Q:Where is the company in the automotive recovery cycle, and why is the recovery slower compared to peers?

A:The automotive recovery is slow due to weakness in Europe and North America, uncertainty in the market, and portfolio rationalization. The company hit the bottom in Q2 and expects growth in Q3. The slower recovery is attributed to mix and exposure differences compared to peers.

Q:What is the strategic repositioning in ISG, and what is the revenue impact?

A:The company is focusing on machine vision products rather than human vision products, targeting high-quality revenue and differentiation. The revenue impact is expected to be $50-100 million in 2026, inclusive of the 5% from end-of-life products.

Q:What is the expectation for distributor inventories in Q3?

A:Distributor inventories are expected to remain in the range of 9-11 weeks, consistent with the company's sweet spot.

Q:Is the 5% of business being exited gross margin accretive, and how does silicon carbide fit into the gross margin ledger?

A:The 5% of business being exited is currently around the corporate average for gross margin but will be dilutive to long-term aspirations of 50%+ gross margin. Silicon carbide gross margins are below the corporate average due to underutilization but are expected to improve with volume and manufacturing leverage.

Q:What is the outlook for Q3 across end markets?

A:All end markets (Auto, Industrial, and Other) are expected to be up in Q3. Auto and Industrial are expected to grow low single digits, while Other is expected to grow mid- to high single digits, driven by AI data center ramps.

Q:What is the company's view on the impact of Section 232 and 301 tariffs?

A:The company is maintaining flexibility and focusing on what it can control, such as its manufacturing footprint, to navigate potential tariff impacts.

Q:How is the company addressing the bankruptcy of a silicon carbide peer?

A:The company is winning based on its own product performance and investments, not due to a peer's struggles. Customer sourcing decisions were made before the bankruptcy, and the company continues to focus on differentiation and market share gains.

Q:What is the impact of utilization on gross margins, and what is the company's fully utilized capacity?

A:Each point of utilization improvement contributes 25-30 basis points to gross margin. Fully utilized capacity is now in the low 90% range, post-impairment. The company expects to recover 700 basis points from utilization and another 200 basis points from Fab Right initiatives.

Q:What is the company's approach to inventory levels and utilization rates?

A:Inventory levels are expected to peak in Q2 and decline through the rest of the year. Utilization rates are flat quarter-on-quarter, and the company is focused on burning through strategic inventory while maintaining healthy inventory levels.

Q:What is the pricing environment, and has it changed over the last 90 days?

A:The pricing environment is stable and within expectations, with no significant changes over the last 90 days.

Q:What is the revenue headwind from exiting noncore business in 2025 and 2026?

A:The revenue headwind is expected to be $200 million in 2025 and $300 million in 2026, with $100 million already exited year-to-date in 2025.

Q:What is the status of the East Fishkill fab and its impact on gross margins?

A:The East Fishkill fab is operational, with power products and image sensors qualified and shipping. The fab's utilization is part of the overall network, and its performance is meeting expectations.

Q:What is the company's view on the shift from silicon carbide modules to chips?

A:The company provides both modules and chips, maintaining flexibility based on customer needs. The shift does not change the company's view of the market, as it continues to win based on product performance and differentiation.

Q:What is the company's view on hybrid inverters and their impact on silicon carbide demand?

A:The company sees no change in its market view due to hybrid inverters. It continues to focus on providing a range of technologies, including silicon carbide and IGBTs, to meet customer needs.

Q:Is there any written-off inventory that could impact recovery?

A:No, written-off inventory does not have demand and cannot impact recovery. The company has a disciplined approach to inventory management and is focused on burning through healthy inventory.

Q:What are the major components of the Other segment, and how big is it?

A:The Other segment is primarily driven by the AI data center business, which is growing rapidly but remains a small part of the overall company.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the percentage of the automotive business in China, the exact size of the AI data center business within the Other segment, and the impact of Section 232 and 301 tariffs. Additionally, they did not disclose detailed revenue cuts for Auto and China or provide a clear timeline for the ramp of certain products like the 800-volt rack opportunity.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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