ON - NASDAQ

Good day and thank you for standing by. Welcome to the Onsemi first quarter 2025 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’ll need to press star-one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-one-one again. Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Parag Agarwal. Please go ahead.

Thank you Kevin. Good morning and thank you for joining Onsemi’s first quarter of 2025 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 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 will 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?

Thank you Parag. Good morning and thanks to everyone for joining us on the call. Despite a challenging macroeconomic landscape, we delivered Q1 revenue of $1.45 billion and non-GAAP earnings per share of $0.55. Both exceeded the midpoint of our guidance, with non-GAAP gross margin of 40%. Our focus remains on streamlining our operations through our Fab Right approach and investing in R&D to deliver differentiated products to our customers. Both initiatives aim to deliver gross margin expansion as the market recovers. In an uncertain geopolitical environment, our manufacturing network is a source of competitive advantage as we have proactively established a flexible and geographically diversified supply chain for our customers that not only enhances supply resilience but also reduces our risk exposure. With 19 front and back end facilities in addition to our external network, we are well positioned to respond effectively to tariff-related concerns. Based on our understanding of current tariff policies, our expectation is that there will be minimal direct impact to our business. At this time, we expect no major issues in servicing our global customer base and are assisting these customers to minimize their impact by optimizing our supply chains. Although we began to see early signs of stabilization with favorable booking trends towards the end of the first quarter in certain parts of the industrial market, inventory digestion persists and customers remain cautious, as I described last quarter. While customers optimize their working capital in this extended downturn, we have used pricing to defend or increase share in strategic areas over the long term and expect low single-digit pricing declines in certain parts of our business. On the revenue side, following a strong Q4, our automotive revenue in the first quarter declined 26% sequentially, in line with our expectations. Our industrial revenue was better than expected, decreasing only 4% sequentially. The traditional parts of the industrial market are starting to show signs of recovery. You’ll recall this was the first part of industrial to show signs of weakness going into the downturn. Medical and aerospace and defense also increased sequentially, and our AI data center revenue, which we report as part of our other bucket, more than doubled year-over-year in the first quarter. Our differentiated intelligent power and sensing solutions enable us to deliver the performance and power efficiency that our customers need to thrive in their space. Through the downturn, we continued investing to diversify our portfolio and deliver differentiation as the market landscape continues to evolve. In automotive, while inventory digestion persisted in the first quarter, leading OEMs are adopting our silicon carbide in their next platform architectures. We have extended our technology leadership with our fourth generation EliteSiC MOSFET devices based on trench architecture. We have already secured a new 750 volt plug-in hybrid electric vehicle, or PHEV, designed with one of our major U.S. automotive OEMs. This signals the beginning of a transition from silicon to silicon carbide in new PHEV platforms to extend vehicle range and reach a broader customer base, adding to our penetration in full battery electric vehicles, or BEVs, where we continue to gain share over incumbents. Based on the latest electric vehicle launches in China, most of which were unveiled last week at the Shanghai Auto Show, we expect to have our silicon carbide in nearly 50% of the new models. Most of these new models are set to ramp in late 2025, including a PHEV with our silicon carbide. Broader adoption of SiC in PHEVs is expected over the next few years as OEMs redesign hybrid platforms to meet tightening global emissions standards and capitalize on the performance offered by silicon carbide technology to extend the range. We are also winning with our image sensors in automotive applications, which continued to be a differentiator for Onsemi. The superior performance of our technology makes Onsemi the partner of choice for top automakers. In the first quarter, we began shipments of our 8 megapixel image sensor to the leading OEM in China with a global footprint, where we expect to be designed into ADAS systems for their low, mid and high-end vehicles. Another OEM based on Asia has selected our 8 megapixel image sensor for their next generation ADAS platform. In AI data center, we continue to make progress in our strategy by leveraging our strengths in intelligent power. Silicon carbide and silicon-powered devices anchor that strategy and are instrumental in every branch of the power tree. At the entry point of power into the data center, we are capitalizing on the transition to modular UPS systems with our EliteSiC power module solutions, delivering higher efficiency and power density than traditional silicon solutions. We are shipping to the three largest UPS suppliers and with a new platform win that began ramping in Q1, we expect our revenue for UPS to grow between 40% and 50% for the full year over 2025. Within the power supply unit and the battery back-up unit, our silicon carbide JFET combines with our T10 trench FETs to create a winning high power AC-to-DC solution. SiC JFETs are essential in the transition from 3 kilowatt to 5 kilowatt PSUs required in the next generation architecture, and only Onsemi has this distinctive technology. SiC JFET is superior in these high current solutions because it offers the lowest ON resistance in a given footprint. Similarly, our T10 MOSFETs offer industry-leading ultra-low RDS (on) and reduced switching losses. We are ramping with a large U.S. hyperscaler, securing the majority share in their PSU and BBU. We are expanding our portfolio of power solutions using a combination of FETs and power management ICs to address the intermediate bus conversion and Vcore branch of the power tree. With the launch of our Treo platform last November, we introduced our expanding portfolio, including voltage translators, LVOs ultra-low power analog front ends, ultrasonic sensors, multi-phase controllers for clients, and single pair Ethernet controllers for automotive zonal architecture applications. Advancements through the Treo platform are enabling us to accelerate development and deliver innovative solutions to our customers across automotive, medical, industrial and AI data center markets at accretive margins. We have already recognized the first production revenue from the Treo platform and are well on our way to doubling the number of products available year-over-year as we build the franchise towards delivering on our $1 billion commitment by 2030. As we look ahead, while the semiconductor industry is navigating complex macroeconomic factors, there is an increasing need for semiconductors to include power efficiency and sensing capabilities in rapidly evolving sectors like AI data centers, automotive and industrial. Through this downturn, we have maintained our strategic direction and we have continued to deliver value to our customer base on the performance of our technology. We are focused on operational excellence and are well positioned for a recovery with gross margin expansion as we continue to realize the benefits of our Fab Right initiatives. Let me now turn it over to Thad to give you more detail on our results and approach going into the second quarter of 2025.

Thanks Hassane. While it was a challenging start to the year, continuing to focus on operational excellence has allowed us to drive costs out of our operations to focus on free cash flow generation. We exceeded the midpoint of our guidance with revenue of $1.45 billion and non-GAAP earnings per share of $0.55, while Q1 free cash flow increased 72% year-over-year. We increased our share buyback to 66% of free cash flow, repurchasing $300 million of shares in the first quarter. With our large capital investment behind us, we are confident in our liquidity and strong balance sheet and believe returning capital to shareholders is the best use of capital. For 2025, we intend to increase our share repurchase to 100% of free cash flow. As of today, there is approximately $1.5 billion remaining on our repurchase authorization, and we expect free cash flow will remain strong with the cost control actions we have taken, aggressive working capital management, and limited capital investments. Last quarter, I told you that we would be moving aggressively and with urgency in making structural changes to expand gross and operating margins and generate strong free cash flow in the future. In the first quarter, we took two significant steps to benefit the company in the long term and better position us for a market recovery. First, as part of our Fab Right initiative, we reduced our internal fab capacity by 12% through our manufacturing realignment ramp to lower our fixed cost structure. These actions will reduce our ongoing depreciation costs by approximately $22 million on an annualized basis, and we expect to see the benefit on the income statement in Q4 of this year. We will continue to rationalize our manufacturing footprint, driving gross margin expansion towards our long term target and providing greater leverage in our business model as the market recovers. The second action in Q1 was a company-wide restructuring initiative. We made the difficult decision to reduce our global workforce by 9% and further reduce our non-manufacturing sites, driving sustainable efficiencies across the company. These actions are expected to generate approximately $25 million of savings in Q2 versus Q1 with an additional $5 million per quarter of savings realized in the second half of the year. These actions are structural rather than temporary and will drive incremental leverage in both gross and operating margin for the long term. Coupled with our lower capital intensity, we remain on track to our targeted 25% to 30% free cash flow margin for the year. Turning to financial results for the quarter, a slowdown in demand across all end markets resulted in revenue of $1.45 billion, above the midpoint of our guidance. Automotive and industrial accounted for 80% of revenue in the first quarter. Automotive revenue was $762 million, which decreased 26% sequentially driven by weakness in Europe and seasonality in Asia, mainly in China due to Chinese New Year. Revenue for the industrial was $400 million, down 4% sequentially, while our medical and aerospace and defense businesses continue to grow, traditional industrial remains stable. Outside of auto and industrial, our other businesses increased 1% quarter-over-quarter, mainly driven by client computing business offset by normal seasonality in wireless. Looking at the first quarter split between the business units, revenue for the power solutions group, or PSG was $645 million, a decrease of 20% quarter-over-quarter and 26% year-over-year. Revenue for the analog and mixed signal group, or AMG was $566 million, a decrease of 7% quarter-over-quarter and a decrease of 19% year-over-year. Revenue for the intelligent sensing group, or ISG was $234 million, a 23% decrease quarter-over-quarter. ISG revenue decreased 20% over the same quarter last year. Turning to gross margin in the first quarter, GAAP gross margin was 20.3%, which includes restructuring charges as a part of our manufacturing realignment program. Non-GAAP gross margin was 40%, down 530 basis points sequentially and 590 basis points from the quarter a year ago. Non-GAAP gross margin declined in line with guidance due to the lower revenue and under-absorption, with lower utilization levels over the last few quarters. Manufacturing utilization increased slightly from 59% in Q4 to 60%, which does not include any impact from our capacity reduction actions. Now let me give you some additional numbers for your models. GAAP operating expenses for the first quarter were $868 million as compared to $328 million in the first quarter of 2024. GAAP operating expenses increased sequentially as it includes restructuring charges of $539 million. Non-GAAP operating expenses were $315 million compared to $314 million in the quarter a year ago. GAAP operating margin for the quarter was negative 39.7%, and non-GAAP operating margin was 18.3%. Our GAAP tax rate was 13.5% and non-GAAP tax rate was 16%. Diluted GAAP earnings per share for the first quarter was a loss of $1.15 as compared to earnings of $1.04 in the quarter a year ago. Non-GAAP earnings per share was $0.55 as compared to $1.08 in the Q1 of 2024. GAAP diluted share count was 421 million shares and our non-GAAP diluted share count was 422 million shares. Turning to the balance sheet, cash and short term investments was $3 billion with total liquidity of $4.1 billion, including $1.1 billion undrawn on our revolver. Cash from operations was $602 million and free cash flow increased 72% year-over-year to $455 million, representing 31% of revenue. Capital expenditures during Q1 were $147 million. Inventory was down quarter-over-quarter on a dollar basis by $164 million and increased by three days to 219 days. This includes 100 days of bridge inventory to support fab transitions in silicon carbide. We expect this inventory to peak in the second quarter. Excluding the strategic builds, our base inventory is healthy at 119 days. Distribution inventory declined another $27 million with weeks of inventory increasing to 10.1 weeks versus 9.6 weeks in Q4. Our plan to support the mass market has continued to pay dividends, resulting in another 29% increase in customer count year-over-year. We do not expect a material change in the weeks of inventory over the near term. Looking forward, let me provide you the key elements of our non-GAAP guidance for the second quarter. As a reminder, today’s press release contains a table detailing our GAAP and non-GAAP guidance. First, our guidance is inclusive of our current expectation that there is no material direct impact of tariffs announced as of today. Given our current visibility, we anticipate Q2 revenue will be in the range of $1.4 billion to $1.5 billion. Our non-GAAP gross margin is expected to be between 36.5% and 38.5%, which includes share-based compensation of $8 million. Our second quarter guide includes 900 basis points of non-cash under-absorption charges, and we expect utilization to decline slightly in Q2. Approximately half of the sequential gross margin decline is from the increased under-absorption in Q2 and the remaining is attributable to unfavorable pricing, as we are seeing low single-digit price declines. Moving onto non-GAAP operating expenses, we expect opex to be in the range of $285 million to $300 million, including share-based compensation of $29 million. We expect our non-GAAP other income to be a net benefit of $11 million with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 16% and our non-GAAP diluted share count is expected to be approximately 419 million shares. This results in non-GAAP earnings per share to be in the range of $0.48 to $0.58. We expect capital expenditures in the range of $70 million to $90 million. We took difficult steps in the first quarter to right-size and refocus the company on the key drivers to achieve our long term ambitions. By continuing to lean into our Fab Right strategy and focus on higher value product lines, we are committing to building a solid foundation that will be a tailwind when the macro environment becomes more robust. In the meantime, we will remain cautious in our approach and position ourselves to capitalize in the future on strong customer relationships with our intelligent power and sensing platforms. With that, I’ll turn the call back over to Kevin to open up the line for Q&A.

Thank you. [Operator instructions] Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.

Hi guys, thanks for letting me ask a question. I guess my first one, on the revenue side of things, you guys have been consistent with your conservatism, but the flat guide seems to be a bit below the up low single to high single-digit sequential growth that your peers are seeing. Is there anything structurally different at ON that would keep you from experiencing the same sort of upturn that others have started to allude to?

Hey Ross. No, it’s not really structural. It’s really depending on the end markets that we versus our peers are exposed to. As you know, we have a big focus on automotive for EVs specifically. EV outside of China still has not seen the recovery. China, as I have mentioned, we’ve gotten a lot of the wins - that’s where most of the ramp is happening in the second half of 2025, so other than just within the markets, whether you’re broad or more focused on sub-markets, like we are for the EV, that’s the only thing I could point to.

Great, thanks. For my follow-up, perhaps with Thad on the gross margin side of things, the charge that you took and then generally looking forward, what are the metrics we should use to think about gross margin? You’ve been very overt with your second quarter, but what do we think about, say second half or relative to revenue growth? How much of it just utilization based, absorption based, or are there many idios that ON has? Just any metrics to help us hone in on that would be great.

Yes, so as I mentioned, we took about 12% of our capacity offline, and that was late in the first quarter so you didn’t really see much of an impact of that in the first quarter. As we go forward with this new footprint, the incremental--as utilization goes up, for every point of utilization, it’s now 25 to 30 basis points of gross margin improvement. Previously that was 20 to 25, so it’s now increased because of taking that capacity offline. As I mentioned, there’s about $22 million of depreciation savings on an annualized basis. We’ll start to see that hitting the P&L in Q4 just because of the lag with the inventory bleed - it takes time for that to hit. But as we go forward, the gross margin expansion in the short term is all about utilization, so as the market recovers, utilization will go up. Now, we are expecting utilization to go down slightly here in Q2, but if we--based on early signs of some stabilization and recovery, we’re hoping that we’ll see some improvement later in the year, and then we’ll see that impact hitting us in late ’25 and in ’26.

Thank you.

One moment for our next question. Our next question comes from Vivek Arya with Bank of America. Your line is open.

Thanks for taking my question. I had a question on pricing. I think, Hassane or Thad, in the past you had mentioned you are pricing to value, right, and suggested that pricing could stay more resilient. But now, I think you are suggesting that pricing could be a headwind, that it could go down low single digits, and I’m curious what has changed, if anything? Is it a geographic issue, is it a product, is a competitive headwind? Just what has changed on the pricing side, and how much of this flat Q2 sales is because of pricing and then how much is pricing a headwind when we look at the back half of the year?

Yes, so what changed, obviously we’ve been in this downturn, it’s a very extended downturn, and we have to react to market conditions or competitive threats, that some of our competitors are using pricing, and we are going to use pricing to defend and increase share in forward-looking programs. I don’t see that, my comments as going back to the old pricing ways, where it’s the first quarter obviously, and then if not in the first quarter for us, it’s the second. It’s not a plan that I can give you what it is by quarter or what it is for the second half. We’re using it as a tool. We have forward-looking programs that are actually beneficial from a gross margin perspective, that we will defend or even penetrate and increase share based on pricing decisions we make today, so we are going to take it as a tool, but it is a different environment we are operating in. It’s not geographical, it is not specific to a product. It’s really what I would call a more opportunistic approach to it. From the revenue side, I wouldn’t read any more into it from the revenue in Q2. It’s not--the revenues specifically are top line, it’s more on demand driven. It is not really on the pricing impacts specifically.

Okay, and then my follow-up question, I think Thad, you mentioned something on gross margin. When we look at Q2, the low end is 36.5%, and I think you mentioned that some of it was because of under-absorption and some of it was pricing. If we start to hypothetically see sales grow from Q3 and Q4, what should be the new range of gross margins that we should be thinking about for the back half of the year, like even a broad range, I think would be useful in aligning the model. Thank you.

Yes, so as I was saying earlier, the impact of utilization is about a two-quarter delay for it to hit the P&L, as you’ve got to burn through roughly 200 days of inventory to see that benefit. It takes about two quarters for that to impact. Given that we’re expecting Q2 utilization to step down here slightly in Q2, that will be a little bit of a headwind. If you think about the rest of this year, we’re likely going to be kind on in this--let’s use the midpoint of our guidance, kind of in this range. Again, we think this is temporary - it’s utilization driven. If you take that 900 basis points of under-absorption, you add it to our guide, that gives you an indication of kind of where our standard margin is and where we think sustainability is in the short term. But for the remainder of this year, I think we’re going to be in this tight range here with improvement coming, assuming that utilization does improve as the market recovers later in the second half. I think there’s a nice tailwind going forward. I think for the next couple quarters, we are in this, let me call it 37.5%, 38% range, just depending on utilization.

Thank you.

One moment for our next question. Our next question comes from Chris Danely with Citi. Your line is open.

Hey, thanks guys. Given the pricing environment and you’re saying you’re using pricing to defend market share, can you just give us an update on that $350 million to $400 million non-core business that you are going to exit? Is that still the plan as the size of that changed how rapidly you think you’re going to exit that this year, or will you try and defend your market share and use pricing on that business? Thanks.

Yes, so what I--specifically on the pricing, we still expect to exit that. We’ve always said this is more market dependent than anything else. I do include some of the pricing in there just to offset some of the utilization in the short term, but it is not on that specific, what I would call the non-core exits that we are planning. We are not defending it to the point where we want to keep it. You can think about it as it helps with utilization, we’ll modulate it in the short term, but our expectation remains.

Yes, and Chris, I would add in the first quarter, we walked away from about $50 million of that business. We still think that $300 million is probably the likely number for the year. It will be market dependent. If we can hold margins on that in a favorable range, we will keep it, so I think it’s really going to be dependent on how the market plays out and the recovery plays out.

Okay, great. For my follow-up, it sounds like there’s some nice momentum on silicon carbide exiting this year. Any update on, I guess, the long term growth rate you’re expecting there, and then how about the gross margin range, do you still think you can get that business to 50%?

Yes, from a long term range, obviously we’re not guiding. We’re still expecting growth, we’re expecting to be the market share leader in that business, based on the traction we’ve had today and really the wins, the outlook of the wins, not just the ones we’re ramping in 2025. I mentioned some of the trends for going to the plug-in hybrids with silicon carbide - we have been penetrating that, which will ramp in the outer years, so the outlook remains unchanged. We are still very bullish about the prospects of our silicon carbide within that market and the position we will keep and gain. As far as gross margin, we do believe that the gross margin--today the gross margin is really more impacted by the under-utilization. If you recall, we added the capacity for the market that didn’t really turn out. We modulated a little bit on the capacity that we kept online, but from a standard margin perspective, we are still pricing on value, and as we grow into the capacity that we installed, we still believe we have the best cost structure in the industry.

Okay, thanks Hassane.

One moment for our next question. Our next question comes from Joshua Buchalter with TD Cowen. Your line is open.

Hey guys, thank you for taking my question. For my first one, I kind of wanted to look backwards. Entering the year, you guys called out that demand had gotten appreciably worse. It looked like in the quarter, things tracked to where you were expecting, but your peers didn’t really flag all that much of a demand deterioration in the quarter. Can you maybe look back and reflect on what’s happened over the last few months in particular for Onsemi, and in particular, was this in your view an inventory issue that you guys needed to clean up, or were there legitimate pockets of demand that weakened? Thank you.

Yes, the quarter played out pretty tightly to what we expected. We were above the midpoint of our guidance. The industrial was more favorable than we expected. Automotive was right on to what we expected going into the quarter. Our other business, a small piece of it, a small piece of the total was favorable as well, being up 1%, so I think in terms of what we saw within the quarter, it pretty much came in line with what we expected. We did see some early signs of stabilization in the industrial market, specifically the traditional industrial side of that business. There are some pockets that are still down, but we took that as a favorable sign coming out of the quarter. Now, there is uncertainty given the tariff situation, but there’s some early signs of stabilization which gives us some hope.

Okay, thank you. I was also hoping for a little more--could you maybe explain a bit of what’s in the $283 million restructuring charge that was in gross margin? Was that primarily inventory write-down, and could you speak to how you’re thinking about your ON book and channel inventory now? Thank you.

Yes, okay, there’s a lot there. On the restructuring, we did a restructuring and then we also did a capacity reduction as well, so an impairment of some of our assets. What hit the gross margin line is a part of the manufacturing realignment program. We did take inventory out as we took capacity out in some of the areas as we’re de-focusing there and as our manufacturing footprint changed, so we had some consumables and other inventory that we took as a part of that charge. What hit the opex line, obviously, was restructuring charges associated with more of the restructuring activity, rather than the Fab Right activities.

On the distribution, there’s no change in our distribution. Obviously we’re taking a very disciplined approach to channel inventory, although the weeks are, call it flattish around the 10, which is the sweet spot of where we believe we’re going to be long term - you know, we said between 9 and 11 weeks. We actually drained dollars out of the channel as we remain cautious on the outlook. Obviously for our distribution inventory, we’re always cautious not to ship in more than what we can see demand for, and we’ll remain disciplined on that, so no change and no impact in the DC inventory.

Yes, and then on the inventory on the balance sheet, we have 219 days. It did go down by $164 million - part of that is the write-off that we took as a part of the restructuring activities. But if you look at our base inventory, exclude the fab transitions in silicon carbide, it’s at 119 days, so it’s healthy. Our target has always been 100 to 120 days, do we’re within that target. I expect inventory will be peaking here in the second quarter, and we’ll start to drain in Q3 and Q4 as the fab transitions continue to get executed and we stop buying from the divested fabs that we divested a few years ago. Inventory should be peaking here.

Okay, thank you. I apologize for my three-for-one question.

One moment for our next question. Our next question comes from Blayne Curtis with Jefferies. Your line is open.

Hi, this is Crawford Clark on for Blayne Curtis with Jefferies. Thanks for taking my question, and congrats on the results. I wanted to ask about the industrial segment - I think you’ve talked a little bit about it thus far in response to some other questions, but it sounds like some of your competitors are talking about maybe a little bit more of a broad-based recovery in their end markets. I know you mentioned some strength in aerospace and defense and medical, but was hoping you might be able to put a finer touch on some of the trends you’re seeing outside of those two sub-segments. Thanks.

Yes, obviously I can only focus and comment on the markets, or the sub-markets in industrial we’re focusing on strategically and not as a broad base, because we’re not a broad-based industrial supplier. I would say outside of some of the energy infrastructure, everything is up, so I would say broadly it is starting to see signs of recovery - that’s what Thad said, including some of what we call the consumer side of industrial. If you recall, that was the first one that actually went into the downturn, so we’re starting to see signs of recovery there. From a green shoot and a stabilization perspective, we’re actually more positive about industrial now. There are a few pockets, but again there is still uncertainty given the geopolitical environment and the tariffs. Outside of that, we do see stabilization and we do see signs of that recovery.

Got it, very helpful. Then if you could just talk a little bit about your expectations for demand within the automotive segment by geography - I know people are calling out strength in China, obviously first quarter was a little bit tougher given some trends related to Chinese New Year, but if you could talk again about your expectations for demand in auto by geo. Thanks.

Yes, same thing - we do see strength in China automotive specifically, driven by EVs, and for us it’s driven by new ramps for silicon carbide, as I mentioned. Coming out of the Shanghai Auto Show, we do see the models that we are in, the models that are going into production. We’re about 50% of these new models that are ramping, and we expect that to start ramping in the second half and therefore our automotive market, China specifically. Other regions, we’ll see, but from a positive outlook, I would say automotive in China EV is the focus, and we see that as remaining favorable.

Yes, and let me give a little more color to your first question on the guidance going forward. We expect industrial and the other bucket both to be up mid to high single digits quarter-on-quarter. We think auto is going to be down, again just as Hassane talked about, kind of in that high single digit percentage as well. But to your point, we’re seeing industrial strength and we’re seeing it continue in the second quarter.

Great, thanks guys.

One moment for our next question. Our next question comes from Quinn Bolton with Needham & Company. Your line is open.

Hey guys. I think before your capacity actions, you guys had sized the business to have a 45% gross margin, at one point $7 billion of revenue at a 65% utilization rate. Post the fab capacity actions you’ve taken, are there new metrics you can give us just to help level-set, you know, as demand recovers, utilization recovers, where gross margins could go over the next year or two?

Yes, I think I gave the data point earlier that every point of utilization is now 25 to 30 basis points of gross margin improvement. If you think about us today roughly at 60%, stepping down slightly in the second quarter in terms of utilization, you can do the math getting back up to 85%. I also gave the data point that we’re--the gross margins in Q2 are expected to be negatively impacted by 900 basis points of under-absorption, so as I said, the gross margin is going to be driven by utilization in the short term.

Got it, but the standard, I guess then, utilization or standard gross margin would be about 46.5, right? If I take the midpoint of the range, add that 900, that’s where you would get back to as utilizations increase, but is that utilization getting back to 65%, 75%, or should we just use the 25 to 30 basis points of utilization and assume that’s pretty linear?

Yes, that’s right. That’s right. The 25 to 30 basis points is the right move. The 900 basis points is assuming you get back to fully utilized, right, so that will take us a while to get there, but your math is absolutely right.

Okay, great. Thank you.

One moment for our next question. Our next question comes from Gary Mobley with Loop Capital. Your line is open.

Hi guys, thanks for taking my question. Hassane, you’ve highlighted a couple times the 50% win rate for silicon carbide based models introduced in the Shanghai Auto Show recently. It sounds very impressive, but maybe if you could just establish a little more context in terms of what market share position you’re coming from. Obviously that’s a huge market opportunity, so just sort of size the dollar impact that that could eventually translate into, and did you have to concede on pricing against some of the China suppliers to win that business?

Yes, so first from a market share perspective, we do expect that 50% specifically in China, if you’ll notice, it’s the only EV market that is growing with the 800 volt focus, 800 volt battery which yields to a 1,200 volt silicon carbide device. We do maintain the share there, we see the share increasing. Obviously I’m not giving guidance on the dollars until the customers start ramping. We do see a big ramp in the second quarter already, and that will continue through the second half of the year, so we do see those programs ramping. When I say we see it in the backlog, we’re starting to prep for those shipments, so from a market penetration, I think we can say we have well penetrated the market. It is not a pricing discussion. It is more of a capability discussion. It’s not really competing with the local--you know, you mentioned China for China or local vendors for silicon carbide. Our competition in China specifically is really more with our standard peers, our global peers rather than the local, because we’re still ahead on performance I made the brief comment in the call, we introduced our trench-or sampled our trench, and we’re going to start to see as the new wave of these products to go to market will start revenue on our trench in 2026, so we have a very strong road map on silicon carbide. It is not specifically related to pricing, it is more on performance of the product, which ends up saving a ton of money for our customers on their system level side, whether it’s slower batteries or smaller system costs. That’s the reason we win, and like I said, we’ve maintained and increased our share in China, and we will continue to do that. It’s a big focus market for us.

Thanks Hassane. Just a quick follow-up, it sounds like, and correct me if I’m wrong, that opex could trend down maybe another $5 million per quarter off that $292.5 million base that you’re guiding to for the second quarter.

Yes, that’s right - you’ll get about $5 million per quarter in Q3 and Q4.

Got it, thank you.

One moment for our next question. Our next question comes from Vijay Rakesh with Mizuho. Your line is open.

Yes, hi Hassane and Thad. Just a quick question on the pricing side. Is that [indiscernible] pricing specific to ON or that what you see in the industry, and if you could give us some color on silicon versus silicon carbide [indiscernible], then I have a follow-up.

Yes, I don’t know--I don’t believe the pricing is ON-specific. I think a lot of my peers have talked about it. A lot of my peers have talked about it in the context of the annual price negotiations and so on. I talk about it a little differently. I talk about it as a pocket of pricing in order to maintain or even increase our share, especially in the outlook given where most of our customers are. It’s not something specific, and it is not related to silicon or silicon carbide specifically. I’m not breaking it down to that, because we are using it as a tool. Now, one thing on the pricing as well, a lot of people fail to also look at along with any of these low single-digit pricing declines that we talked about, we’re working on cost improvements for our products as well, which are usually at that range or slightly above, so forward looking as we gain the share and we ramp, we are expecting to offset most of the pricing declines with cost actions. That’s why we feel comfortable doing it in the short term to maintain and grow the share, but in the long run we usually--we’ve always offset any pricing discussions with cost actions, and you’ve seen us do some of the cost actions today with the fab realignment or capacity realignment discussions that we’ve had. We’re going to continue to do that. I’m not seeing the concerning approach or a concerning sign. It doesn’t change our trajectory in the gross margin. We still have very strong gross margin expansion opportunities ahead of - that’s what we are setting up the company for, and as the market recovers, you’re going to start seeing all of that come through the P&L.

Got it, thanks. Just a quick follow-up - on the order side, the high single digit percent down sequentially, is that--are you seeing some headwinds from the auto tariffs or auto parts? Can you give us some more color around there? Thanks.

Yes, look - we said we don’t have direct impact from the tariffs for our business. That’s the only thing I can comment on at this point, because the tariff is one day yes, one day no. It’s too soon to talk about any impact, indirect impact, meaning to us, therefore an impact to our customers. That’s too soon to call that. That’s where in our guide, we talked about we remain cautious based on what we know today There’s no direct impact, however there could be indirect impact, but that is a time-based question which I don’t have an answer to, therefore the best thing I can give you is our cautiousness in the guide and our outlook.

We also haven’t seen any material pull ins or push outs as it relates to tariffs, so as Hassane said, no direct impact. Indirect over the long term, we’ll see what happens; but in the short term, we haven’t seen any customer activity that would give us concern.

Got it, thanks.

One moment for our next question. Our next question comes from Harlan Sur with JP Morgan. Your line is open.

Good morning, and thanks for taking my question. Your shipments to direct customers were better for the second consecutive quarter; in fact, over the past two quarters, your direct business is up 3% versus your disti business is down about 34%. Do your direct customers just have less excess inventory and therefore maybe you guys are shipping more towards consumption trends? Any color on the large divergence would be helpful.

No, not really anything to read into that. A lot of our distribution business also, or half of our distribution business is going to customers that we deal with directly. The other half of our distribution is more on fulfillment, so I wouldn’t read a lot into it. But we did talk about some of the pockets of inventory subsiding as far as the inventory drain, which is translating into better than expected industrial and [indiscernible] of industrial. I look at all of these overall as a single outlook or single indication to where the markets are, but not specifically disti or direct.

I appreciate that. Then part of the weaker dynamic back in Q4 was a lower book of turns business. You saw better booking trends towards the end of this particular quarter, or the reported March quarter. Did that include your turns business, and what’s in your guidance for this quarter, June quarter, are you guys assuming similar, higher, lower turns percentage versus Q1?

Yes Harlan, I would say we saw strength, right? We saw strength late in the quarter in terms of order patterns, right, and specifically on the industrial side of the house. As we look into Q2, we still need turns, right - I mean, I think customers are booking at lead times, just given the uncertainty, but we still need turns, and I would say it’s pretty consistent with how entered the first quarter as well, so no material change other than order patterns, I think have gotten a little more stable, a little more predictable.

Great, thank you.

One moment for our next question. Our next question comes from Tore Svanberg with Stifel. Your line is open.

Yes, thank you. I had a longer term question on Treo - Hassane, you reiterated the $1 billion for 2030, and you did talk about some design wins. Could you help us a little bit - you know, where are you getting these design wins, and could we start to see already some material revenue in Treo next year?

Yes, that’s a good question. First off, our exposure with Treo is really very broad. I gave some examples that span from automotive, from AI data center, and from industrial, medical. The beauty of the platform is it’s very versatile as far as going from high performance analog to high power drivers and high power PMiX and so on, so overall we’re very pleased with the traction. I talked about we remain on track to double the number of products year-on-year - that remains on track and a focus for the team, and really we’re starting to ship revenue this year. As far as material revenue, of course, it’s a ramping business, ramping product revenue, and more importantly at more favorable margins. We talked about the margin profile for that Treo platform being 60% to 70% - that remains true as we start to ramp and will continue as we expand. As far as material revenue in 2026, obviously it’s going to be more material than it is this year, but material from a company. You’re still not going to see it at a company level given the scale of our other business, and other business is ramping as well. But where we are today, based on where we expect it to be, we’re on track, actually slightly ahead, but we’re very excited about the promise of the franchise that we’ve built.

Yes, thank you for that color. As my follow-up for Thad - Thad, capex 6% of revenue this quarter, with the new footprint, how should we think about capex for the second half of the year?

Yes, for the whole year, there’s some lumpiness, right, in terms of the capex, just based on timing of equipment coming in; but most of our capex now is just maintenance capex, so for the year, you should think about capex as being in that mid-single digit percentage of revenue. With the lower capital intensity, this is what’s giving us confidence in the free cash flow and why we’re increasing our buyback to 100% of free cash flow.

Great, thank you.

One moment for our next question. Our next question comes from David Williams with The Benchmark Company. Your line is open.

Hey, good morning. Thanks for taking the question. I guess first is can you give us a revenue run rate to get to that full capacity utilization, just given what you’ve taken out this quarter?

Look, I don’t have a specific number as you think about it sitting here, because it’s going to depend on internal versus external. I think if you model the downside of as capacity came out or utilization decreased, it’s likely the same going up. We manufacture about 70% of our products in-house, but I think it’s going to be very linear as revenue increases, but I don’t have a top line because it depends on mix. If higher value products are ramping first, that will have a different impact than lower ASP products, but I think from a modeling standpoint, you should just look at the downside and the upside is very similar.

Thanks for the color there. Then just secondly, and I think Hassane, you spoke to this earlier, but just wondering what you’re seeing in terms of the silicon carbide competitive dynamics within the domestic market in China. It sounds like we’re seeing more of that, but just kind of curious how you’re seeing that. Obviously your performance is better, but how do you think this plays out over the next 12 to 18 months? Could we see that shift back into maybe the more domestic side, given the tariff situation? Thanks.

Yes, I don’t think we are in the same bucket as some of the locals. The local, they’re not really competing at the stage where we are with our customers. I mentioned most of our competition are the global peers, not really the local. Now, is there going to be, just like IGBT, a small sliver in the market that’s really not looking for performance but just an on/off switch, that would potentially use the local? Yes, but that’s not really a focus market for us. Where we play, which is really performance especially as the automotive OEMs in China want to compete on a global scale, which most of them do, they’re going to be focusing really on performance, really on integration and system-level performance impact, which is really us, and we come in the lead. We’re seeing that in the--I mentioned on the 50% penetration, just based on the Shanghai Auto Show from a few weeks ago, so with that, it gives me comfort. Now obviously, we’re not sitting still. I talked about introducing our trench, which is again yet a new generation for us versus the global peer and versus the local vendors in China, so we’re not standing still from R&D. As they develop their local solutions, we’re going to maintain our technology leadership. It is not a question of tariffs in this case because, as you know, our silicon carbide is manufactured outside of the U.S. from a global footprint as well, and our flexibility in our supply chain gives us a lot of options to serve the customers, but most of the decision at a customer level is really made on technology and our performance. That’s how we’ve always won, and that’s how we continue to win.

Thank you. One moment for our next question. Our next question comes from Christopher Rolland from Susquehanna. Your line is open.

Thanks for squeezing me in, guys. Hassane, perhaps just back to your last answer there, just as we think about potential reciprocal tariffs, you were talking about flexibility in your footprint. Some people have a China for China strategy. How do you serve China without these reciprocal tariffs, and do you increase a fab-less relationship in country? I know you deal with SMIC [ph], I think, do you increase that relationship? What is the flexibility that you do have to address reciprocal tariffs in China, let’s say?

Yes, so first, I don’t want to ponder on what the tariff could or could not be, given just the volatility of the tariff situation one day versus the other. I will give you what we are doing, which is what we control. First off, we are in China and we do have manufacturing in China. We have a couple of our sites--manufacturing sites are actually in China. We do have foundry relationships, so we are not looking at China from the outside. We’re looking at China from the inside, so therefore for me, I’m not worried about the impact of it. We have a lot of--19 factories total globally. It gives us full flexibility. Most of our products are qualified in more than one location, which means from servicing the customers, whether a customer is in China or a customer in China that would export, we are very well positioned for it. Of course, we’re always looking at our strategic footprint, whether we do something specifically in China or not, but there has to be a strategic need for it, not just in reaction to a tariff that may or may not be there. We look at it from a technology perspective, we look at it from a competitive advantage perspective. We do feel very competitive with our existing footprint and we’ll continue to address that.

Thank you for that. As a second question, just as I look at disti inventory, this is the lowest level of disti inventory you guys have had in quite some time. I’m just wondering, is there a change in strategy here or is it just a reflection of the softer outlook? How do you guys know that this is the right level, and I would think given the macro uncertainty, your distis would also want more geographic-based inventory and flexibility there, so why drain the channel at this point in time? Is this where we’re going to hold these inventory levels?

No, so if you think about it from a weeks of inventory, we are where we want it to be - that’s our sweet spot. I said we are focused on 9 to 11 weeks, and we’ll go up or down depending on if we have a ramp in the following quarter or not, so we’ll manage the business within that range. As far as the dollars, we’ve always said we maintain very high discipline on disti inventory. I’ll tell you distribution will take more inventory from us, but however what we are waiting on is really sustainable recovery. We’ve seen starts of it, so as the top line revenue grows into the outlook, then we will continue to feed the inventory in the channel to service the customer. But for us, it is a customer focused effort. I mentioned earlier 50% of our distribution is what we call named customers, so we do have outlook, we do have forecasts, and we do have really backlog from these customers directly, whether we service them through distribution or not. We don’t see that as, call it a strategic drain of inventory but more of a management of the inventory with the outlook that we see and the macro environment. From a dollar perspective, that very well can change as we see more sustainable signs of recovery, but you can expect the weeks of inventory to remain in that range that we described.

Thanks Hassane.

Ladies and gentlemen, this does conclude the Q&A portion of today’s conference. I’d like to turn the call back over to Hassane El-Khoury, President and CEO for any closing remarks.

Thank you for joining us on the call this morning. As we navigate the rest of this year, on behalf of the executive team, I’d like to express my gratitude to our global employees, our customers and our shareholders for their commitment and dedication to Onsemi. Thank you.