ON Semiconductor Corporation (ON) Q3 2025 Earnings Call Transcript

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

Overview

The earnings call shows mixed sentiments: positive momentum in AI and automotive sectors, strategic investments, and optimistic guidance. However, concerns exist over utilization rates, unclear responses from management, and non-repeating revenue impacting 2026. The Q&A highlights stabilization but cautious outlooks and vague management answers. Thus, the sentiment is neutral, reflecting balanced positives and negatives.

Key Financial Performance

Revenue $1.55 billion, increasing 6% over Q2. Automotive revenue was $787 million, which increased 7% sequentially, driven by increases in Americas, China and Japan. Revenue for Industrial was $426 million, up 5% sequentially, primarily driven by aerospace, defense and security. Outside of Auto and Industrial, our Other business increased 2% quarter-over-quarter with continued momentum in AI data center.

Gross Margin GAAP gross margin was 37.9%, and non-GAAP gross margin was 38%, above the midpoint of our guidance due to favorable mix within the quarter.

Operating Margin GAAP operating margin for the quarter was 17% and non-GAAP operating margin was 19.2%.

Earnings Per Share (EPS) Diluted GAAP earnings per share was $0.63 and non-GAAP earnings per share was also $0.63.

Cash and Short-term Investments Approximately $2.9 billion with total liquidity of $4 billion, including $1.1 billion undrawn on our revolver.

Cash from Operations $419 million and free cash flow was $372 million. Year-to-date free cash flow is 21% of revenue.

Capital Expenditures $46 million or 3% of revenue.

Inventory Decreased by $39 million to 194 days from 208 days in Q2. This includes 82 days of bridge inventory to support fab transitions and silicon carbide, down from 87 days in Q2. Excluding the strategic builds, base inventory is healthy at 112 days.

Share Repurchase Repurchased $325 million of shares in the third quarter. Since February 2023, repurchased $2.1 billion with approximately $861 million remaining on authorization.

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Operating Highlights

Treo platform: New products continue to scale, with a design funnel exceeding $1 billion. Teledyne Technologies selected the platform for next-gen infrared imaging systems.

Vertical GaN (vGaN): Launched a proprietary GaN-on-GaN architecture, reducing energy loss by up to 50%. Sampling underway with lead customers in automotive and AI.

SiC JFET: Deployed in low-orbit satellite platforms and ramping revenue in AI data centers for high current workloads.

Vcore acquisition: Acquired Vcore Power Technology and IP assets to enhance AI data center solutions. Sampling begins this quarter, with production expected in early 2026.

Automotive and Industrial: Stabilization observed, with Automotive revenue growing 7% and Industrial revenue growing 5% sequentially.

AI: Revenue approximately doubled year-over-year in Q3, with $250 million expected in 2025.

Regional performance: Revenue in the Americas grew 22%, Japan grew 38%, Europe declined 4%, and China declined 7% sequentially.

Manufacturing utilization: Increased to 74% in Q3, with plans to stabilize or slightly reduce in Q4.

Inventory management: Inventory decreased by $39 million, with distribution inventory within the target range.

Capital efficiency: Year-to-date free cash flow margin at 21%, with $925 million of shares repurchased.

AI data center power efficiency: Secured wins in solar and energy storage platforms foundational to AI deployments. Collaborating with NVIDIA on 800-volt DC power architecture.

Portfolio and manufacturing changes: Structural changes made to drive margin expansion and position for market recovery.

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Risk or Challenges

Market Recovery and Demand Normalization: The company is positioning for market recovery and demand normalization, but there is no guarantee that these conditions will materialize as expected, posing a risk to revenue growth.

Geographical Revenue Declines: Revenue in Europe decreased by 4% due to macroeconomic softness, and revenue in China declined by 7% sequentially, indicating regional challenges that could impact overall performance.

Regulatory and Tariff Risks: The guidance assumes no material direct impact of tariffs announced as of today, but any changes in tariffs or regulations could adversely affect financial performance.

Manufacturing Utilization and Inventory Management: Manufacturing utilization is expected to be flat to down slightly in Q4, and inventory management remains a challenge with 82 days of bridge inventory to support fab transitions and silicon carbide.

Competitive Pressures in AI and Semiconductor Markets: The company faces intense competition in AI, automotive, and semiconductor markets, which could impact its ability to secure design wins and maintain market share.

Economic Uncertainties: Macroeconomic softness in Europe and potential economic uncertainties in other regions could impact demand and revenue.

Supply Chain and Production Risks: The company is managing fab transitions and silicon carbide production, but any disruptions could impact manufacturing efficiency and product availability.

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Guidance & Outlook

Revenue Guidance for Q4 2025: Anticipated revenue range of $1.48 billion to $1.58 billion.

Non-GAAP Gross Margin Guidance for Q4 2025: Expected to be between 37% and 39%, including share-based compensation of $8 million.

Non-GAAP Operating Expenses for Q4 2025: Expected to range between $282 million and $297 million, including share-based compensation of $32 million.

Non-GAAP Earnings Per Share (EPS) for Q4 2025: Projected to be in the range of $0.57 to $0.67.

Capital Expenditures for Q4 2025: Expected to range between $20 million and $40 million.

Market Recovery and Stabilization: The company is positioning for market recovery and expects stabilization in Automotive and Industrial markets. AI revenue is projected to reach approximately $250 million in 2025.

Growth in AI and Energy Efficiency: AI data center electricity demand is projected to quadruple by 2030. The company is focusing on high-efficiency power technologies to address this demand.

Silicon Carbide (SiC) and Vertical GaN (vGaN) Developments: Sampling of vGaN with lead customers in Automotive and AI is underway. SiC JFET revenue is expected to grow in 2025 and continue double-digit growth in 2026.

New Product Launches and Strategic Wins: Sampling of new products integrated into the Treo platform begins this quarter, with production release expected in early 2026. Strategic wins in solar and energy storage platforms are foundational to hyperscale AI deployments.

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Shareholder Return Plan

Share Repurchase Program: Year-to-date, the company has repurchased $925 million of shares, returning approximately 100% of its free cash flow to shareholders. Since launching the share repurchase program in February 2023, the company has repurchased $2.1 billion worth of shares. At the end of the quarter, approximately $861 million remained on the authorization for further repurchases.

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Key Q&A

Q:What caused the upside in the automotive market in Q3, and what is the sustainability of this growth into Q4 and 2026?

A:The upside in Q3 was attributed to stabilization in the automotive market, seasonal trends, and ramps in new designs. However, management emphasized that quarter-on-quarter changes are due to seasonality and ramps, and they are not guiding specifically by market into 2026. They also noted that a restocking cycle has not yet occurred.

Q:How does ON differentiate itself in the AI business, and what is the growth outlook for the $250 million AI revenue?

A:ON differentiates itself by being one of the only companies able to support power delivery from high voltage to the core with its product portfolio, including JFET silicon carbide and AMG products. The AI data center business is expected to grow, with ON positioning itself as a share gainer in the market.

Q:What is the outlook for seasonality in Q1 and growth in 2026 compared to three months ago?

A:There is no change in the outlook compared to three months ago. Management expects Q1 to follow normal seasonal patterns, typically down 2% to 3%.

Q:What is the impact of utilization rates on gross margins, and what are the seasonal patterns in Q1?

A:Utilization increased to 74% in Q3 due to building die bank inventory for the mass market. Utilization is expected to decrease in Q4 as builds are completed, with a normalized utilization rate moving forward. Seasonal patterns in Q1 typically result in gross margins being slightly lower, but management did not provide specific guidance.

Q:Has the ongoing situation at Nexperia impacted ON's business?

A:Management stated it is too soon to call any impact from the Nexperia situation. They are supporting customers with their complete portfolio but are not redirecting any changes in their business strategy.

Q:Will the automotive market outgrow the industrial market in the next few quarters?

A:Management does not compare the two markets directly, as growth differences are driven by market timing and macro factors. Both markets have growth vectors, and the lumpiness is temporary.

Q:What is the normal seasonal pattern for Q4, and is ON undershipping the market?

A:The normal seasonal pattern for Q4 is flat to down 2%. Management believes the current guidance of down 1% is within the normal range and reflects seasonal patterns rather than undershipping the market.

Q:How is AI revenue distributed across ON's segments, and what is the growth outlook?

A:AI data center revenue is reported in the 'Other' segment, while energy storage and infrastructure are in the Industrial segment. The AI data center segment is expected to grow, contributing to the overall growth of the 'Other' segment.

Q:Is there any change in the revenue headwind from exiting noncore businesses?

A:There is no change in the revenue headwind outlook. The company exited $45 million of noncore businesses in Q3, with $55 million expected in Q4. The total headwind for 2025 remains at $300 million.

Q:What is the status of the Vcore Power acquisition, and how does it contribute to ON's business?

A:The Vcore Power acquisition complements ON's existing product offerings and provides short-term revenue generation while integrating architectural and product functions into the Treo platform. The acquisition is expected to contribute to revenue in 2026.

Q:What is the status of vertical GaN technology, and when is it expected to generate revenue?

A:Vertical GaN technology is in the sampling phase with lead customers in AI and automotive markets. It is expected to generate revenue by 2027.

Q:What is the outlook for silicon carbide revenue growth and its geographic distribution?

A:Silicon carbide revenue growth is on track, with ON gaining share in automotive and AI data center markets. Geographically, the growth is expected to align with electrification trends, with strong presence in China and the U.S., followed by Europe and Japan.

Q:What is the status of lead times and short lead time orders?

A:Lead times have slightly increased to around 20 weeks. Short lead time orders have not significantly changed, but order patterns are improving, indicating stabilization.

Q:What is driving the volatility in revenue by geography, particularly in the Americas and China?

A:The volatility is attributed to order movements between geographies and normal seasonal patterns. A large customer shifted orders from Europe to Japan, impacting the geographic distribution.

Q:Why is ON building up die bank inventory, and how does it impact utilization rates?

A:ON is building die bank inventory to support the mass market, which has seen a 20% year-on-year increase in customer count. This has temporarily increased utilization rates, but inventory levels remain within target ranges.

Q:Does ON have all the IP and building blocks to achieve its power delivery goals by 2027?

A:ON has the necessary IP and building blocks, developed both organically and inorganically, to achieve its power delivery goals. The company is rapidly deploying products and expanding its portfolio.

Q:What is the historical context and future revenue outlook for vertical GaN technology?

A:Vertical GaN technology development began in 2024 through IP and asset acquisition. The technology is now in the sampling phase, with revenue expected by 2027.

Q:What is ON's strategy for the Automotive market in China, and how does it address market volatility?

A:ON's strategy focuses on customer diversification, engaging with both top OEMs and smaller brands to mitigate risks from market volatility and consolidation. This approach has helped ON gain market share consistently.

Q:What is the status of 300-millimeter silicon carbide wafers, and how does it compare to 8-inch wafers?

A:300-millimeter silicon carbide wafers are in early development and not expected to impact the market in the short term. ON's 8-inch wafers are in production and on track for shipping in 2026.

Q:What is the size and performance of the mass market segment within ON's distribution revenue?

A:The mass market segment accounts for approximately 25% of ON's total distribution revenue. It has shown solid customer count improvements and serves as a bright spot for the company.

Q:What has ON done to commercialize vertical GaN technology acquired through NexGen?

A:ON has leveraged its manufacturing capabilities and expertise in wideband gap technologies to scale and mature vertical GaN technology quickly. The Syracuse fab acquired with NexGen has been instrumental in this process.

Q:What do OEMs need to see to start restocking inventory?

A:OEMs need to see credible demand signals, consumer confidence, and geopolitical stabilization to gain confidence in restocking inventory.

Q:What are the drivers and offsets in the 'Other' segment, and what is the growth outlook?

A:The 'Other' segment is driven by AI data center growth and normal seasonality in noncore markets. Exits from noncore businesses offset some of the growth, but the segment is expected to grow mid- to high single digits in Q4.

Q:What is the regional outlook for the Automotive market, particularly in China?

A:The Automotive market in China is expected to remain strong, with ON's customer diversification strategy mitigating risks from market volatility and consolidation. The company continues to gain market share across a broad range of OEMs.

Q:Why isn't the Nexperia situation a bigger deal for ON, and what is the solution to supply chain disruptions?

A:Management believes the Nexperia situation highlights the need for a replenishment cycle and safety stock to buffer disruptions. ON is supporting customers but emphasizes the importance of placing backlog with visibility to stabilize the supply chain.

Q:What is the outlook for Automotive market stabilization and growth?

A:The Automotive market is stabilizing, with better visibility and growth expected in the second half of the year compared to the first half. However, restocking has not yet occurred, and management remains cautious.

Q:What revenue level is needed to achieve 40% gross margins, and how does utilization impact this?

A:Gross margins are driven by utilization rates, with each point of utilization contributing 25 to 30 basis points to gross margin improvement. Management did not specify a revenue level for achieving 40% gross margins.

Q:Review of Unclear Management Responses

A:Management avoided providing direct answers to several questions, including specific guidance for 2026, the impact of utilization rates on Q1 gross margins, and the revenue level needed to achieve 40% gross margins. Responses often included vague language, such as 'normal pricing behavior,' 'too soon to call,' and 'we're monitoring the situation.' Additionally, questions about the Nexperia situation and restocking cycles lacked detailed or actionable insights.

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Earnings Word Cloud

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

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