Onsemi Q1 2025 Earnings Report

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 $1,450,000,000 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 and 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 decline 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 ELISAQ MOSFET devices based on trench architecture.

We have already secured a new seven fifty 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 twenty twenty five, including a PHEV with our silicon carbide. Broader adoption of SiC and PHEVs is expected over the next few years as OEMs redesign hybrid platforms to meet tightening global emission standards and capitalize on the performance offered by silicon carbide technology to extend the range. We're also winning with our image sensors in automotive applications, which continue to be a differentiator for Onsemi. The superior performance of our technology makes Onsemi the partner of choice for the top automakers. In the first quarter, we began shipments of our eight 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 in Asia has selected our eight 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 ELISAQ 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 4050% for the full year over 2024.

Within the power supply unit and the battery backup unit, our silicon carbide JFET combined with our T10 trench FETs to create a winning high power AC to DC solution. SIG JFETs are essential in the transition from three kilowatt to five kilowatt PSUs required in the next generation architecture, and only ON Semi has this distinctive technology. SIG 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 V Core branch of the PowerTree. With the launch of our Trejo platform last November, we introduced our expanding portfolio, including voltage translators, LDOs, 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 diverse 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 $1,000,000,000 commitment by 02/1930. As we look ahead, while the semiconductor industry is navigating complex macroeconomic factors, there is an increasing need for semiconductors to improve 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 recovery with gross margin expansion as we continue to realize the benefit 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 twenty twenty five.

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 EV specifically. EV outside of China still has not seen the recovery.

China, as I've mentioned, we've gotten a lot of the wins. That's where most of the ramp is happening in the second half of twenty twenty five. So other than just within the markets, whether you're broad or more focused on submarkets like we are for the EV, that's the only thing I could point to.

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 increased because of taking that capacity offline. As I mentioned, there's about $22,000,000 of depreciation savings on an annualized basis. We'll start to see that hitting the P and 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 stabilization 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 twenty twenty five and in 2026.

Yes. So what changed, obviously, we've been in this downturn. It's a very extended downturn. And we have to react to market condition or competitive threats that some of our competitors are using pricing. And we are going to use the pricing to defend and increase share in forward looking programs.

So I don't see that as my comments as going back to the old pricing ways, whereas the first quarter obviously, it's not in the first quarter for us, it's the second. So 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 is more opportunistic approach to it. From the revenue side, I wouldn't read any more into from the revenue in Q2. It's not the revenues specifically or the top line, it's more on demand driven. It is not really on the pricing impact specifically.

Yeah. So, as I was saying earlier, the impact of utilization is about a two quarter delay for it to hit the P and L, right, as you've got to burn through roughly two hundred days of inventory to see that benefit. So it takes about two quarters for that to impact. Given that we're expecting Q2 utilization to step down here slightly in Q2, that'll be a little bit of a headwind. So if you think about the rest of this year, we're likely going to be kind of in this, let's use the midpoint of our guidance, kind of in this range.

Again, we think that this is temporary, it's utilization driven. If you take that 900 basis points of under absorption, you add it to guide that gives you an indication of kind of where our standard margins in and kind of where we think sustainability is in the short term. But for the remainder of this year, I think we're going to be kind of in this kind of tight range here with improvement coming, assuming that utilization does improve as the market recovers later in the second half. So I think there's a nice tailwind going forward. I think for the next couple of quarters, are kind of in this, let me call it 37.5%, thirty eight % range, depending on utilization.

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're 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.

Okay, great. And 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 Do you still think you can get that business to 50%?

Thanks Hassan.

Well, 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. So 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.

Yeah, that's right. That's right. So 25 to 30 basis points is the right move. The 900 basis points is assuming you get back to fully utilized, right? So that'll

take

us a while to get there, but your math is absolutely right.

Yeah. So first, from a market share perspective, we do expect that 50%, specifically in China. If you notice, it's the only really 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 that share increasing.

Obviously, I'm not giving a 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, 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 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, we'll start revenue on our trench in 2026. So, we have a very strong roadmap 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 lower batteries or smaller system cost. That's the reason we win. And like I said, we've maintained and increased our share in China, and we'll continue to do that. It's a big focus market for us.

Yes, that's right. You'll get about $5,000,000 per quarter in Q3 and Q4.

I have a follow-up. Yeah, 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. So 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 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

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 it as a concerning approach or concerning sign. It doesn't change our trajectory in the gross margin. We still have very strong gross margin expansion opportunities ahead of us.

That's why we are setting up the company for. And as the market recovers, you're to start seeing all of that come through the P and L.

Yeah, look, we said we don't have a direct impact on the tariff for our business. That's the only thing I can comment on at this point, because look, 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 we, 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. That's therefore the best thing I can give you is our cautiousness in the guide and our outlook.

Got it. Thanks.

Yeah. 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.

Our 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 customers in China or customers 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. So, 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.

No. So, you think about it from our weeks of inventory, we are where we want it to be. That's our sweet spot. I said we're focused on ninety, eleven weeks, and we'll go up or down depending on if we have a ramp in the following quarter or not. So, we will manage the business within that range.

As far as the dollars, we've always said we maintain a very high discipline on this inventory. I'll tell you, distribution will take more inventory from us. But however, what we are waiting on is a 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 the distribution or not. So we don't see that as a, call it, a strategic drain of inventory, but more of a management of the inventory with the outlook that we see in 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've described.