ON Semiconductor - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered revenue of $1.45B and non-GAAP EPS of $0.55, both above the midpoint of guidance; GAAP results were heavily impacted by restructuring, yielding a GAAP diluted loss per share of ($1.15).
• Non-GAAP gross margin fell to 40.0% from 45.3% in Q4 2024 and 45.9% in Q1 2024 due to lower utilization and pricing pockets; GAAP gross margin was 20.3% after $283M restructuring-related inventory and other charges.
• Guidance for Q2 2025: revenue $1.40–$1.50B, non-GAAP gross margin 36.5%–38.5%, non-GAAP EPS $0.48–$0.58; OpEx is guided down materially on restructuring savings, with utilization expected to decline slightly near-term.
• Structural actions and capital return: management reduced internal fab capacity by ~12%, cut workforce by ~9%, and intends to repurchase 100% of 2025 free cash flow (Q1 buybacks: $300M; ~66% of FCF).

What Went Well and What Went Wrong

What Went Well

• Strong free cash flow and disciplined cost/working-capital management: Cash from operations of $602M and free cash flow of $455M (31% of revenue), up 72% YoY; returned 66% of FCF via $300M buybacks.
• Industrial outperformed expectations: industrial revenue decreased only ~4% QoQ with “early signs of stabilization” and better late-quarter bookings trends; medical and aerospace & defense increased sequentially.
• Strategic design-win momentum and AI/data center traction: SiC JFET/MOSFET solutions ramping across UPS/PSU/BBU with hyperscaler wins; UPS revenue expected to grow 40%–50% YoY in 2025; image sensor wins at leading China OEMs.

Quotes:

• “We continue to see strong design win momentum... secured key wins with major global customers across all end-markets.” — CEO Hassane El‑Khoury.
• “For 2025, we intend to increase our share repurchase to 100% of free cash flow.” — CFO Thad Trent.
• “We are ramping with a large U.S. hyperscaler securing the majority share in their PSU and BBU.” — CEO Hassane El‑Khoury.

What Went Wrong

• Automotive softness and utilization under-absorption: automotive revenue down ~26% QoQ (seasonality in China, Europe weakness); utilization ticked to ~60% (from 59%), but non-GAAP gross margin declined to 40% with ~900 bps under-absorption in Q2 guide.
• Pricing pockets: management is using low single-digit price declines opportunistically to defend/increase share, contributing to margin pressure near-term.
• Significant restructuring charges hit GAAP: $539M in OpEx restructuring and $283M in gross restructuring-related inventory charges drove GAAP operating margin to (39.7)% and GAAP net loss of ($486.1)M.

Transcript

Operator (participant)

Good day and thank you for standing by. Welcome to the Onsemi Q1 2025 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll 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.

Parag Agarwal (VP of Investor Relations and Corporate Developments)

Thank you, Kevin. Good morning and thank you for joining Onsemi Q1 2025 Results Conference Call. I'm 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.onsemic.com. A replay of this webcast, along with our Q1 earnings release, will be available on our website approximately one hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the investor relations section of our website.

Our earnings release and this presentation include certain non-GAAP financial measures, reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures, and a discussion of certain limitations when using non-GAAP financial measures are included in our earnings release, which is posted separately on our website in the investor relations section. During the course of this conference call, we'll 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 risk and uncertainties that could cause actual events or results to differ materially from projections.

Important factors that can affect our business, including factors that could cause actual results to differ materially from our forward-looking statements, are described in our most recent Form 10Qs and other filings with the Securities and Exchange Commission and in our earnings release for the Q1. Our estimates or other forward-looking statements might change, and the company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions, or other events that may occur except as required by law. Now, let me turn it over to Hassane.

Hassane El-Khoury (President and CEO)

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 Q1 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 Q1 declined 26% sequentially, in line with our expectations.

Our industrial revenue was better than expected, decreasing only 44% 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 Q1. 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 Q1, 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 and 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'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 Q1, 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 in 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 power 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 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. 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 V-core branch of the power tree. With the launch of our TRAIL 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 TRAIL 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 TRAIL 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 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 details on our result and approach going into the Q2 of 2025.

Thad Trent (EVP and CFO)

Thanks, Hassane. While it was a challenging start to the year, continuing to focus on operational excellence has allowed us to drive cost 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 Q1. With our large capital investment behind us, we're 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 Q1, 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 program to lower our fixed cost structure.

These actions will reduce our ongoing depreciation cost 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 margins for the long term.

Coupled with our lower capital intensity, we remain on track to our targeted 25%-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 Q1. 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 to quarter, mainly driven by client computing business offset by normal seasonality in wireless.

Looking at the Q1 split between the business units, revenue for the Power Solutions Group, or PSG, was $645 million, a decrease of 20% quarter to quarter and 26% year over year. Revenue for the Analog and Mixed Signal Group, or AMG, was $566 million, a decrease of 7% quarter to quarter and a decrease of 19% year over year. Revenue for the Intelligent Sensing Group, or ISG, was $234 million, a 23% decrease quarter to quarter. ISG revenue decreased 20% over the same quarter last year. Turning to gross margin in the Q1, 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 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 Q1 were $868 million as compared to $328 million in the Q1 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 Q1 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 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 a 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 to 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 Q2. 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 Q2. 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-$1.5 billion. Our non-GAAP gross margin is expected to be between 36.5%-38.5%, which includes share-based compensation of $8 million. Our Q2 guide includes 900 basis points of non-cash underabsorption charges, and we expect utilization to decline slightly in Q2. Approximately half of the sequential gross margin decline is from the increased underabsorption in Q2, and the remaining is attributable to unfavorable pricing as we are seeing low single-digit price declines. Moving on to non-GAAP operating expenses, we expect OPEX to be in the range of $285 million-$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-$0.58. We expect capital expenditures in the range of $70-$90 million. We took difficult steps in the Q1 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.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.

Ross Seymore (MD)

Hi guys, thanks for asking the 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 kind of up low singles 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?

Hassane El-Khoury (President and CEO)

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 winds. That's where most of the ramp is happening in the second half of 2025. 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.

Ross Seymore (MD)

Good, thanks. For my follow-up, perhaps with that 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 have been very overt with your Q2, but what do we think about, say, second half or relative to revenue growth? How much of it is 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.

Thad Trent (EVP and CFO)

Yeah, as I mentioned, we took about 12% of our capacity offline, and that was late in the Q1. You did not really see much of an impact of that in the Q1. As we go forward with this new footprint, the incremental, as utilization goes up for every point of utilization, it is now 25-30 basis points of gross margin improvement. Previously, that was 20-25. It has now increased because of taking that capacity offline. As I mentioned, there is about $22 million of depreciation savings on an annualized basis. We will 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. As we go forward, the gross margin expansion in the short term is all about utilization. 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. We will see that impact hitting us in late 2025 and in 2026.

Ross Seymore (MD)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from Vivek Arya with Bank of America. You're live as well, sir.

Vivek Arya (MD)

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

Hassane El-Khoury (President and CEO)

Yeah, 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. We are going to use the pricing to defend and increase share in forward-looking programs. I don't see that as my comments as going back to the old pricing ways where it's the Q1. Obviously, it's not in the Q1 for us. It's the second. It's not a plan that I can give you of 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.

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 revenue specifically or top line is more on demand-driven. It is not really on the pricing impact specifically.

Vivek Arya (MD)

Okay. 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%. 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? Even a broad range, I think, would be useful in kind of aligning the models. Thank you.

Thad Trent (EVP and CFO)

Yeah, as I was saying earlier, the impact of utilization is about a two-quarter delay for it to hit the P&L, right, 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'll be a little bit of a headwind. 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 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 margins are and kind of where we think sustainability is in the short term.

For the remainder of this year, I think we are 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. I think there is a nice tailwind going forward. I think for the next couple of quarters, we are kind of in this, let me call it 37.5%-38% range, just depending on utilization.

Vivek Arya (MD)

Thank you.

Operator (participant)

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

Chris Danely (Analyst)

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 were going to exit? Is that still the plan? Has the size of that changed? How rapidly do 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.

Hassane El-Khoury (President and CEO)

Yeah, 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.

Thad Trent (EVP and CFO)

Yeah, Chris, I would add in the Q1, 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. I think it is really going to be dependent on how the market plays out and the recovery plays out.

Chris Danely (Analyst)

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? How about the gross margin range? Do you still think you can get that business to 50%?

Hassane El-Khoury (President and CEO)

Yeah, 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 winds in the outlook of the winds, 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. The outlook remains unchanged. We're 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 underutilization. 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. From a standard margin perspective, we are still pricing on value. As we grow into the capacity that we installed, we still believe we have the best cost structure in the industry.

Chris Danely (Analyst)

Thanks, Hassane.

Operator (participant)

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

Joshua Buchalter (Director Equity Research)

Hey guys, thank you for taking my question. For my first one, I kind of wanted to look backwards. I mean, entering the year, you guys called out that I think demand had gotten appreciably worse. It looked like in the quarter, things tracked to where you were expecting, but your peers did not really flag all that much of a demand deterioration in the quarter. Can you maybe look back and reflect on what has 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.

Thad Trent (EVP and CFO)

Yeah, look, the quarter played out pretty tightly, I mean, 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, small piece of the total, was favorable as well, being up 1%. 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 are some early signs of stabilization, which gives us some hope.

Joshua Buchalter (Director Equity Research)

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-downs? Could you speak to sort of how you're thinking about your on books and channel inventory now? Thank you.

Thad Trent (EVP and CFO)

Yeah, 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 was, as 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 defocusing there and as our manufacturing footprint changed. 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.

Hassane El-Khoury (President and CEO)

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, 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. No change and no impact to the DC inventory.

Thad Trent (EVP and CFO)

Yeah, and then on the inventory and 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. If you look at our base inventory, exclude the fab transitions and silicon carbide, it's at 119 days. It is healthy. Our target has always been 100-120 days, so we are within that target. I expect inventory will be peaking here in the Q2, and we will 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.

Joshua Buchalter (Director Equity Research)

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

Operator (participant)

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

Blyane Curtis (MD Semiconductor and Semiconductor Capital Equipment Research)

Hi, this is Crawford Clarke on for Blaine 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 subsegments. Thanks.

Hassane El-Khoury (President and CEO)

Yeah, obviously, I can only focus and comment on the markets or the sub-markets in industrial where 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. I would say broadly, it is starting to see signs of recovery. That is what Thad said, including some of the what we call the consumer side of industrial. If you recall, that was the first one that actually went into the downturn. We are starting to see signs of recovery there. From a green shoot and a stabilization perspective, we are actually more positive about industrial now. There are a few pockets, but again, there is still uncertainty given just the geopolitical environment and the tariffs. Outside of that, we do see stabilization, and we do see signs of that recovery.

Blyane Curtis (MD Semiconductor and Semiconductor Capital Equipment Research)

Got it. Very helpful. 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, Q1 was a little bit tougher given some trends related to Chinese New Year. If you could talk again about your expectations for demand in auto by geography. Thanks.

Hassane El-Khoury (President and CEO)

Yeah, 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've mentioned, coming out of the Shanghai Auto Show, we do see the models that we are in, the models that are going to production. We said we're about 50% of these new models that are ramping. We expect that to start ramping in the second half, and therefore our automotive market, China specifically. Other regions, we'll see. From a positive outlook, I would say China, automotive, and China EV is the focus. We see that as remaining favorable.

Thad Trent (EVP and CFO)

Yeah, 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 kind of 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 % as well. To your point, we're seeing industrial strength, and we're seeing it continue in the Q2.

Blyane Curtis (MD Semiconductor and Semiconductor Capital Equipment Research)

Great. Thanks, guys.

Operator (participant)

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

Quinn Bolton (Senior Analyst)

Hey, guys. I think before your capacity actions, you guys had sized the business to have a 45% gross margin at $1.7 billion of revenue at a 65% utilization rate. Post the Fab Capacity Actions you've taken, are there new metrics you can give us sort of just to help level set as demand recovers, utilizations recover, where gross margins could go over the next year or two?

Thad Trent (EVP and CFO)

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

Quinn Bolton (Senior Analyst)

Got it. 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 sort of get back to as utilizations increase. Is that utilization getting back to 65%, 75%, or should we just use the 25 to 30 basis points? The point of utilization is the, and assume that's pretty linear.

Thad Trent (EVP and CFO)

Yeah, that's right. That's right. 25 to 30 basis points is the right move. The 900 basis points is assuming you get back to fully utilized, right? That will take us a while to get there. Your math is absolutely right.

Okay. Great. Thank you.

Operator (participant)

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

Gary Mobley (MD and Senior Equity Analyst)

Hi guys. Thanks for taking my question. Hassane, you've highlighted a couple of times a 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 and just sort of size the dollar impact that that can eventually translate into. Did you have to concede on pricing against some of the China for China suppliers to win that business?

Hassane El-Khoury (President and CEO)

Yeah. First, from a market share perspective, we do expect that 50%, specifically in China. If you notice, it is the only really EV market that is growing with the 800-volt focus, 800-volt battery, which yields to a 1200-volt silicon carbide device. We do maintain the share there. We see that share increasing. Obviously, I am not giving a guidance on the dollars until the customers start ramping. We do see a big ramp in the Q2 already, and that will continue through the second half of the year. We do see those programs ramping. When I say we see it in the backlog, we are starting to prep for those shipments. 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 is 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. 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.

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.

Gary Mobley (MD and Senior Equity Analyst)

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 Q2.

Thad Trent (EVP and CFO)

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

Gary Mobley (MD and Senior Equity Analyst)

Got it. Thank you.

Operator (participant)

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

Vijay Rakesh (MD)

Yeah. Hi, Hassane. Just a quick question on the pricing side. Is that commentary on pricing specific to on, or is that what you see in the industry? If you could give us some color on Silicon versus Silicon Carbide, what do you see in terms of pricing? A follow-up.

Hassane El-Khoury (President and CEO)

Yeah. I do not know. I do not 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 is not something specific, and it is not related to Silicon or Silicon Carbide specifically. I am 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. 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. In the long run, we usually we've always offset any pricing discussions with cost actions. You have 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 it as a concerning approach or a concerning sign. It does not change our trajectory in the gross margin. We still have very strong gross margin expansion opportunities ahead of us. That's what we are setting up the company for.

As the market recovers, you're going to start seeing all of that come through the P&L.

Vijay Rakesh (MD)

Got it. Thanks. Just a quick follow-up. On the auto 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 that? Thanks.

Hassane El-Khoury (President and CEO)

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

Thad Trent (EVP and CFO)

We also have not seen any material pull-ins or push-outs as it relates to tariffs. As Hassane said, no direct impact, indirect over the long term. We will see what happens. In the short term, we have not seen any customer activity that would give us concern.

Vijay Rakesh (MD)

Got it. Thanks.

Operator (participant)

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

Harlan Sur (Executive Director Equity Research)

Good morning. 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 at down about 34%. Do your direct customers just have less excess inventories? Therefore, maybe you guys are shipping more towards consumption trends? Any color on the large divergence would be helpful.

Hassane El-Khoury (President and CEO)

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. I would not 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 green choice of industrial. I look at all of these overall as a single outlook or a single indication to where the markets are, but not specifically distilled or direct.

Harlan Sur (Executive Director Equity Research)

I appreciate that. Part of the weaker dynamic back in Q4 was a lower book of terms business. You saw better bookings trends towards the end of this particular quarter or the reported March quarter. Did that include your terms business? Within your guidance for this quarter, June quarter, are you guys assuming similar, higher, or lower terms percentage versus Q1?

Thad Trent (EVP and CFO)

Yeah. Harlan, I would say we saw strengths, right? We saw strengths 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 time just given the uncertainty, but we still need turns. I would say it is pretty consistent with how we entered the Q1 as well. No material change other than order patterns, I think, have gotten a little more stable, a little more predictable.

Harlan Sur (Executive Director Equity Research)

Great. Thank you.

Operator (participant)

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

Tore Svanberg (MD)

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

Hassane El-Khoury (President and CEO)

Yeah. That's a good question. First off, our exposure with TRAIL 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. Overall, we're very, 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. 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 TRAIL platform being 60%-70%. That remains true as we start the 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. Material from a company, you're still not going to see it at a company level given the scale of our other business. Other business is ramping as well. 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.

Tore Svanberg (MD)

Yeah. 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?

Thad Trent (EVP and CFO)

Yeah. For the whole year, there's some lumpiness, right, in terms of the CapEx, just based on timing of equipment coming in. Most of our CapEx now is just maintenance CapEx. For the year, you should think about CapEx as being in that mid-single-digit % of revenue. With the lower capital intensity, this is what's given us confidence in the free cash flow and why we're increasing our buyback to 100% of free cash flow.

Tore Svanberg (MD)

Great. Thank you.

Operator (participant)

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

David Williams (Equity Research Analayst)

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

Thad Trent (EVP and CFO)

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

David Williams (Equity Research Analayst)

Great. Thanks for the color there. Just kind of 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.

Hassane El-Khoury (President and CEO)

Yeah. I don't think we are in the same bucket as some of the local. 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? Yeah, 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 a system-level performance impact, which is really us, and we come in the lead.

We're seeing that in my mention on the 50% penetration just based on the Shanghai Auto Show from a few weeks ago. 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. We're not standing still from an R&D. As they develop their local solutions, we're going to maintain our technology leadership. It is not a question of tariff in this case because, as you know, our silicon carbide is manufactured outside the U.S. from a global footprint as well. Our flexibility in our supply chain gives us a lot of options to serve the customers. Most of the decision at a customer level is really made on technology and our performance. That's how we've always won.

That's how we continue to win.

Operator (participant)

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

Christopher Rolland (Semiconductor Analyst)

Thanks for squeezing me in, guys. And 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 fabless relationship in-country? I know you deal with SMIC, I think. Do you increase that relationship? What is the kind of flexibility that you do have to address reciprocal tariffs in China, let's say?

Hassane El-Khoury (President and CEO)

Yeah. First, I do not 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 manufacturing sites actually in China. We do have found relationships. We are not looking at China from the outside. We are looking at China from the inside. Therefore, for me, I am 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. 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.

Christopher Rolland (Semiconductor Analyst)

Thank you for that. As a second question, just as I look at distilled inventory, this is the lowest level of distilled inventory you guys have had in quite some time. I am 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? I would have thought, given the macro uncertainty, your distilled would also want more geographic-based inventory and flexibility there. Why drain the channel at this point in time? Is this where we are going to hold these inventory levels?

Hassane El-Khoury (President and CEO)

No. If you think about it, from our weeks of inventory, we are where we want to be. That's our sweet spot. I said we're 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. We will manage the business within that range. As far as the dollars, we've always said we maintain a very high discipline on distilled inventory. I'll tell you, distribution will take more inventory from us. However, what we are waiting on is a really sustainable recovery. We've seen starts of it. As the top line revenue grows into the outlook, we will continue to feed the inventory in the channel to service the customer. For us, it is a customer-focused effort. I mentioned earlier, 50% of our distribution is what we call named customers.

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. We do not 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. You can expect the weeks of inventory to remain in that range that we have described.

Christopher Rolland (Semiconductor Analyst)

Thanks, Hassan.

Operator (participant)

Ladies and gentlemen, that has concluded 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.

Hassane El-Khoury (President and CEO)

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.

Operator (participant)

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.