ON Semiconductor Q1 2025 Earnings Report

ON Semiconductor EPS Results

• Actual EPS: $0.55
• Consensus EPS: $0.51
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: $1.08

ON Semiconductor Revenue Results

• Actual Revenue: $1.45 billion
• Expected Revenue: $1.40 billion
• Beat/Miss: Beat by +$42.96 million
• YoY Revenue Growth: -22.40%

ON Semiconductor Announcement Details

• Quarter: Q1 2025
• Date: 5/5/2025
• Time: Before Market Opens
• Conference Call Date: Monday, May 5, 2025
• Conference Call Time: 9:00AM ET

ON Semiconductor (NASDAQ:ON), commonly known as onsemi, is a global provider of semiconductor solutions focused on energy-efficient electronics. The company originated as a spinoff of Motorola’s semiconductor division in 1999 and rebranded to ON Semiconductor in 2002. Headquartered in Phoenix, Arizona, onsemi has grown through strategic acquisitions and organic innovation to address the evolving needs of its end markets. The company’s product portfolio spans from discrete and analog components to custom modules and comprehensive system solutions.

ON Semiconductor’s core business activities include the design, manufacture, and sale of power management integrated circuits, sensors, analog and mixed-signal ICs, and advanced imaging devices. Its power management products support applications in industrial automation, communications infrastructure, and consumer electronics by improving energy efficiency and system reliability. The company’s imaging and sensing solutions, including CMOS image sensors and LiDAR components, enable advanced driver assistance systems (ADAS) and autonomous vehicle platforms, as well as industrial and security applications.

The company operates a diversified manufacturing network, with facilities in North America, Europe, and Asia, and maintains a robust supply chain through partnerships with leading wafer foundries. Sales and customer support offices are located across more than 30 countries, ensuring localized service and collaboration with original equipment manufacturers (OEMs) and electronics designers. onsemi’s global footprint equips it to serve customers in the automotive, industrial, communications, computing, and consumer markets with high-reliability products.

Leadership at ON Semiconductor is headed by President and Chief Executive Officer Hassane El-Khoury, who has guided the company since 2011. Under his stewardship, onsemi has emphasized a strategy of sustainable growth, operational excellence, and targeted R&D investment. The executive team and Board of Directors bring extensive experience in semiconductor technology and global business management, steering the company’s efforts toward market expansion in electrification, intelligent sensing, and power solutions for next-generation electronic systems.

ON Semiconductor Q1 2025 Earnings Call Transcript

Key Takeaways

• Onsemi reported $1.45 billion in Q1 revenue and $0.55 non-GAAP EPS, both above the midpoint of guidance, with a 40% non-GAAP gross margin.
• As part of its Fab Right strategy, the company cut internal fab capacity by 12% and reduced its workforce by 9%, expected to save about $25 million in Q2 and $5 million per quarter thereafter.
• Onsemi secured silicon carbide wins in 50% of new EV models in China, with ramping of these PHEV and BEV platforms slated for late 2025.
• Q2 guidance implies flat revenue of $1.4–$1.5 billion and a non-GAAP gross margin of 36.5–38.5%, reflecting low single-digit price declines and 900 basis points of under-absorption.
• AI data center revenue more than doubled year-over-year in Q1 and Onsemi expects UPS segment growth of 40–50% in FY25 as new modular power solutions ramp.

Presentation

[Operator]

Good day and thank you for standing by. Welcome to the Onsemi First Quarter twenty twenty five Earnings Conference Call. At this time, participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised today's conference is being recorded.

[Operator]

I would now like to hand the conference over to your speaker today, Parag Agarwal. Please go ahead.

[Parag Agarwal, Vice President, Investor Relations and Corporate Development at ON Semiconductor]

Thank you, Kevin. Good morning, and thank you for joining Onsemi's first quarter of twenty twenty five results conference call. I'm joined today by Hassan Al Khoury, our President and CEO and Thad Tran, 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 thirty days following this conference call.

[Parag Agarwal, Vice President, Investor Relations and Corporate Development at ON Semiconductor]

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 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 could cause actual events or results to differ materially from projections.

[Parag Agarwal, Vice President, Investor Relations and Corporate Development at ON Semiconductor]

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 ks, Form 10 Qs, 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 Hassan. Hassan?

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Thad Trent, EVP & CFO at ON Semiconductor]

Thanks, Hassan. 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 $1,450,000,000 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 $300,000,000 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.

[Thad Trent, EVP & CFO at ON Semiconductor]

For 2025, we intend to increase our share repurchase to 100% of free cash flow. As of today, there is approximately $1,500,000,000 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 FabRite initiative, we reduced our internal fab capacity by 12% through our manufacturing realignment program to lower our fixed cost structure.

[Thad Trent, EVP & CFO at ON Semiconductor]

These actions will reduce our ongoing depreciation cost by approximately $22,000,000 on an annualized basis, and we expect to see the benefit on the income statement in Q4 of this year. We'll continue to rationalize our manufacturing footprint, 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 $25,000,000 of savings in Q2 versus Q1, with an additional $5,000,000 per quarter of savings realized in the second half of the year.

[Thad Trent, EVP & CFO at ON Semiconductor]

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 $1,450,000,000 above the midpoint of our guidance. Automotive and Industrial accounted for 80% of revenue in the first quarter. Automotive revenue was $762,000,000 which decreased 26% sequentially, driven by weakness in Europe and seasonality in Asia, mainly in China due to Chinese New Year.

[Thad Trent, EVP & CFO at ON Semiconductor]

Revenue for the Industrial was $400,000,000 down 4% sequentially, while our Medical and Aerospace and Defense businesses continue to grow, Traditional and Industrial remained 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 $645,000,000 a decrease of 20% quarter over quarter and 26% year over year. Revenue for the Analog and Mixed Signal Group or AMG was $566,000,000 a decrease of 7% quarter over quarter and a decrease of 19% year over year. Revenue for the Intelligent Sensing Group or ISG was $234,000,000 a 23% decrease quarter over quarter.

[Thad Trent, EVP & CFO at ON Semiconductor]

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 five thirty basis points sequentially and five ninety 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.

[Thad Trent, EVP & CFO at ON Semiconductor]

Now, let me give you some additional numbers for your models. GAAP operating expenses for the first quarter were $868,000,000 as compared to $328,000,000 in the first quarter of twenty twenty four. GAAP operating expenses increased sequentially as it includes restructuring charges of $539,000,000 Non GAAP operating expenses were $315,000,000 compared to $314,000,000 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%.

[Thad Trent, EVP & CFO at ON Semiconductor]

Diluted GAAP earnings per share for the first quarter was a loss of $1.15 as compared to earnings of $1.4 in the quarter a year ago. Non GAAP earnings per share was $0.55 as compared to 1.8 in Q1 of twenty twenty four. GAAP diluted share count was $421,000,000 shares and our non GAAP diluted share count was $422,000,000 shares. Turning to the balance sheet, cash and short term investments was $3,000,000,000 with total liquidity of $4,100,000,000 including $1,100,000,000 undrawn on our revolver. Cash from operations was $6.00 $2,000,000 and free cash flow increased 72% year over year to $455,000,000 representing 31% of revenue.

[Thad Trent, EVP & CFO at ON Semiconductor]

Capital expenditures during Q1 were $147,000,000 Inventory was down quarter over quarter on a dollar basis by $164,000,000 and increased by three days to two nineteen days. This includes one hundred 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 one hundred and nineteen days. Distribution inventory declined another $27,000,000 with weeks of inventory increasing to 10.1 versus 9.6 in Q4.

[Thad Trent, EVP & CFO at ON Semiconductor]

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.

[Thad Trent, EVP & CFO at ON Semiconductor]

Given our current visibility, we anticipate Q2 revenue will be in the range of $1,400,000,000 to $1,500,000,000 Our non GAAP gross margin is expected to be between 36.538.5%, which includes share based compensation of $8,000,000 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 on to non GAAP operating expenses, we expect OpEx to be in the range of $285,000,000 to $300,000,000 including share based compensation of 29,000,000 We expect our non GAAP other income to be a net benefit of $11,000,000 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 $419,000,000 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 70,000,000 to $90,000,000 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.

[Thad Trent, EVP & CFO at ON Semiconductor]

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 and A. Thank you.

[Operator]

Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.

[Ross Seymore, Managing Director at Deutsche Bank]

Hi, guys. Thanks for letting me ask 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 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?

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Ross Seymore, Managing Director at Deutsche Bank]

And for my follow-up, perhaps for Thad, on the gross margin side of things. The charge that you took and then generally looking forward, how 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, half or relative to revenue growth? How much of it is just utilization based, absorption based?

[Ross Seymore, Managing Director at Deutsche Bank]

Or are there many ideals that Aon has? Just any metrics to help us hone in on that would be great.

[Thad Trent, EVP & CFO at ON Semiconductor]

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.

[Thad Trent, EVP & CFO at ON Semiconductor]

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.

[Thad Trent, EVP & CFO at ON Semiconductor]

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.

[Ross Seymore, Managing Director at Deutsche Bank]

Thank you.

[Operator]

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

[Vivek Arya, Managing Director at Bank of America]

Thanks for taking my question. I had a question on pricing. I think Hassan or Tad, in the past you had mentioned your pricing to value, right, and suggested that pricing could stay kind of more resilient. But now I think you're suggesting that pricing could be a headwind, that it could go down low single digit. And I'm curious, you know, what has changed?

[Vivek Arya, Managing Director at Bank of America]

If anything, is it a geographic issue? Is it a product? Is it a competitive headwind? Just, you know, what has changed on the pricing side? And how much of this flat Q2 sales is because of pricing?

[Vivek Arya, Managing Director at Bank of America]

And then how much is pricing a headwind when we look at the back half of the year?

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Vivek Arya, Managing Director at Bank of America]

Okay. And then, my follow-up question, I think, Pat, 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. So, 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?

[Vivek Arya, Managing Director at Bank of America]

Like even a broad range, I think, would be useful in kind of aligning the models. Thank you.

[Thad Trent, EVP & CFO at ON Semiconductor]

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.

[Thad Trent, EVP & CFO at ON Semiconductor]

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.

[Vivek Arya, Managing Director at Bank of America]

Thank you.

[Operator]

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

[Christopher Danely, Analyst at Citigroup]

Hey, thanks guys. So 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 $350,000,000 to $400,000,000 non core business that you're 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?

[Christopher Danely, Analyst at Citigroup]

Or will you try and defend your market share and use pricing on that business? Thanks.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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 & CFO at ON Semiconductor]

Yes. And Chris, I would add, in the first quarter, we walked away from about $50,000,000 of that business. We still think that $300,000,000 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.

[Thad Trent, EVP & CFO at ON Semiconductor]

So I think it's really going to be dependent on what how the market plays out and the recovery plays out.

[Christopher Danely, Analyst at Citigroup]

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%?

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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 in the outlook of the wins, just the ones we're ramping in 2025. I mentioned some of the trends for going to the plug in hybrids with silicon carbide.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

We have been penetrating that, which will ramp in the outer years. So 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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Christopher Danely, Analyst at Citigroup]

Thanks Hassan.

[Operator]

Our next question comes from Joshua Buchalter with TD Cowen. Your line is open.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

Hey, guys. Thank you for taking my question. For my first one, I kind of want 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.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

But your peers didn't 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 On Semi? 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 & CFO at ON Semiconductor]

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. And our other business, small piece of it, small piece of the total was favorable as well-being up 1%.

[Thad Trent, EVP & CFO at ON Semiconductor]

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 like 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.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

Okay, thank you. Then I was also hoping for a little more, can you maybe explain a bit of what's in the $283,000,000 restructuring charge that was in gross margin? Was that primarily inventory write downs? And could you speak to sort of how you're thinking about your on books and channel inventory now? Thank you.

[Thad Trent, EVP & CFO at ON Semiconductor]

Yes. Okay, there's a lot there. So, on the restructuring, we did a restructuring and then we also did a capacity reduction as well. So, 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.

[Thad Trent, EVP & CFO at ON Semiconductor]

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 FabRite activities.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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 ten, which is the sweet spot of where we believe we're going to be long term. We said between nine and eleven weeks. We actually drained dollars out of the channel as we remain cautious on the outlook.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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 to the DC inventory.

[Thad Trent, EVP & CFO at ON Semiconductor]

Yeah, and then on the inventory in the balance sheet, we have two nineteen days. It did go down by $164,000,000 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 and silicon carbide, it's at one hundred and nineteen days. So it's healthy, our target has always been one hundred to one hundred and twenty days, so we're within that target. I expect inventory will be peaking here in the second quarter and 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. So inventory should be peaking here.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

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

[Operator]

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

[Crawford Clarke, Senior Equity Research Associate at Jefferies]

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.

[Crawford Clarke, Senior Equity Research Associate at Jefferies]

I know you mentioned some strength in aerospace and defense and medical, but was hoping you might be to put a finer touch on some of the trends you're seeing outside of those two sub segments. Thanks.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

Yes, obviously, I can only focus and comment on the markets or the submarkets in industrial we're focusing on strategically and not as a broad base, because we're not a broad based industrial supplier. So 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 the, what we call the consumer side of industrial. And if you recall, that was the first one that actually went into the downturn.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

So we're starting to see signs of recovery there. So from a green shoot and stabilization perspective, we're actually more positive about industrial now. There's a few pockets, but again, there's 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.

[Crawford Clarke, Senior Equity Research Associate at Jefferies]

Got it. Very helpful. And 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.

[Crawford Clarke, Senior Equity Research Associate at Jefferies]

Obviously, 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 geography?

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

Yes. Same thing.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

Therefore, our automotive market, China specifically, other regions, we'll see. But from a positive outlook, I would say China automotive and China EV is the focus, and we see that as remaining favorable. Yes. And let me give

[Thad Trent, EVP & CFO at ON Semiconductor]

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 Sasan 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.

[Crawford Clarke, Senior Equity Research Associate at Jefferies]

Great. Thanks, guys.

[Operator]

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

[Quinn Bolton, Senior Analyst at Needham & Company]

Hey guys, I think before your capacity actions, you guys had sized the business to have a 45% gross margin at $1,700,000,000 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 & CFO at ON Semiconductor]

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.

[Quinn Bolton, Senior Analyst at Needham & Company]

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 sort of get back to as utilizations increase. But is that utilization getting back to 65%, seventy five %? Or should we just use the 25 to 30 basis points?

[Quinn Bolton, Senior Analyst at Needham & Company]

Right. Of utilization is that as and assume that's pretty linear.

[Thad Trent, EVP & CFO at ON Semiconductor]

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.

[Quinn Bolton, Senior Analyst at Needham & Company]

Okay. Great. Thank you.

[Operator]

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

[Gary Mobley, Managing Director & Senior Equity Analyst at Loop Capital]

Hi, guys. Thanks for taking my question. Hassan, 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, you know, 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.

[Gary Mobley, Managing Director & Senior Equity Analyst at Loop Capital]

And did you have to concede on pricing against some of the China for China suppliers to win that business?

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Gary Mobley, Managing Director & Senior Equity Analyst at Loop Capital]

Thanks, Sasan. Just a quick follow-up. It sounds like, and correct me if I'm wrong, that OpEx could trend down maybe another $5,000,000 per quarter off that $292,500,000 base that you're guiding to for the second quarter?

[Thad Trent, EVP & CFO at ON Semiconductor]

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

[Gary Mobley, Managing Director & Senior Equity Analyst at Loop Capital]

Got it. Thank you.

[Operator]

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

[Vijay Rakesh, Managing Director at Mizuho Financial Group]

Yeah. Hi, Hassan. Just a quick question on the pricing side. Is that commentary on pricing specific to on or is that what you're seeing in the industry? If you could give us some color on silicon versus silicon carbide, what do you see in terms of pricing?

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Vijay Rakesh, Managing Director at Mizuho Financial Group]

Got it. Thanks. And just a quick follow-up on the auto side, the high single digit percent down sequentially. Is that so are you seeing some headwinds from the auto tariffs or auto parts? Or Can you give us some more color on that? Thanks.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Thad Trent, EVP & CFO at ON Semiconductor]

We also haven't seen any material pull ins or push outs as it relates to tariffs. So, as Hassan said, no direct impact, indirect over long term, we'll see what happens. But in the short term, we haven't seen any customer activity that would give us concern.

[Vivek Arya, Managing Director at Bank of America]

Got it. Thanks.

[Operator]

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

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

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

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

I appreciate that. And then part of the weaker dynamic back in 4Q was a lower book of turns business. You saw better bookings trends towards the end of this particular quarter or the reported March. Did that include your turns business? And what's in your guidance for this quarter, June, are you guys assuming similar, higher, lower turns percentage versus 1Q?

[Thad Trent, EVP & CFO at ON Semiconductor]

Yes, Harlan, I would say, we saw strengths, right? We saw strengths late in the quarter in terms of order patterns, right? And specifically in 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.

[Thad Trent, EVP & CFO at ON Semiconductor]

And I would say it's pretty consistent with how we entered the first quarter as well. No material change other than order patterns, think, have gotten a little more stable, a little more predictable.

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

Great. Thank you.

[Operator]

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

[Tore Svanberg, Managing Director at Stifel Financial]

Yes. Thank you. I had a longer term question on on Treo. Hassan, you reiterated the 1,000,000,000 for 02/1930, and you did talk about some design wins. Just could you help us a little bit where are you getting these design wins?

[Tore Svanberg, Managing Director at Stifel Financial]

And could we start to see already some material revenue in TRIO next year?

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

Yes. That's a good question. First off, our exposure with Trejo 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 PMICs and so on.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

So 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. 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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

We talked about the margin profile for that Treo platform being 60% to 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. 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.

[Tore Svanberg, Managing Director at Stifel Financial]

Yes. Thank you for that color. As my follow-up for Todd, CapEx six percent of revenue this quarter, with the new footprint, how should we think about CapEx for the second half of the year?

[Thad Trent, EVP & CFO at ON Semiconductor]

Yeah, for the whole year, like 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, should think about CapEx as being in that mid single digit percentage 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, Managing Director at Stifel Financial]

Thank you.

[Operator]

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 Analyst at The Benchmark Company LLC]

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

[Thad Trent, EVP & CFO at ON Semiconductor]

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 kind of as capacity came out or utilization decreased, it's likely the same going up. So 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.

[David Williams, Equity Research Analyst at The Benchmark Company LLC]

Thanks for the color there. And then just kind of secondly, and I think Hassan 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, performance is better, but how do you think this plays out over the next twelve to eighteen months? Could we see that shift back into maybe the more domestic side given the tariff situation? Thanks.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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 onoff switch that would potentially use the local, yeah, but that's not really a focused market for us.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

So, 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. 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 peer global peer and versus the local vendors in China.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

So, we're not standing still from an R and 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 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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

But 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]

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

[Christopher Rolland, Senior Equity Analyst at SIG Group]

Thanks for squeezing me in guys. Hassan, 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?

[Christopher Rolland, Senior Equity Analyst at SIG Group]

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, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

We do feel very competitive with our existing footprint, and we'll continue to address that.

[Christopher Rolland, Senior Equity Analyst at SIG Group]

Thank you for that. As a second question, just as I look at DSD inventory, this is the lowest level of DSD inventory you guys have had in quite some time. And so 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?

[Christopher Rolland, Senior Equity Analyst at SIG Group]

And I would have think, given the macro uncertainty, your disties would also want more geographic based inventory and flexibility there. So why drain the channel at this point in time? Yeah, just is this where we're going to hold these inventory levels?

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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.

[Operator]

Thanks, Hassan. Ladies and gentlemen, this does conclude the Q and A portion of today's conference. I'd like to turn the call back over to Hassan Elkari, President and CEO, for any closing remarks.

[Hassane El-Khoury, Executive Director, President & CEO at ON Semiconductor]

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 OnSami. Thank you.

[Operator]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, have a wonderful day.

Participants

Executives

• Parag Agarwal, Vice President, Investor Relations and Corporate Development
• Hassane El-Khoury, Executive Director, President & CEO
• Thad Trent, EVP & CFO

Analysts

• Ross Seymore, Managing Director at Deutsche Bank
• Vivek Arya, Managing Director at Bank of America
• Christopher Danely, Analyst at Citigroup
• Joshua Buchalter, Director - Equity Research at TD Cowen
• Crawford Clarke, Senior Equity Research Associate at Jefferies
• Quinn Bolton, Senior Analyst at Needham & Company
• Gary Mobley, Managing Director & Senior Equity Analyst at Loop Capital
• Vijay Rakesh, Managing Director at Mizuho Financial Group
• Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co
• Tore Svanberg, Managing Director at Stifel Financial
• David Williams, Equity Research Analyst at The Benchmark Company LLC
• Christopher Rolland, Senior Equity Analyst at SIG Group