onsemi NASDAQ: ON executives said the company is increasing factory utilization to meet stronger demand in AI data center markets while maintaining its longer-term focus on automotive and industrial customers.
Speaking at a KeyBanc Capital Markets event, President and CEO Hassane El-Khoury said the company’s decision to prioritize certain data center demand was a temporary operating adjustment rather than a strategic shift away from automotive and industrial markets. While finished products cannot be redirected once packaged for specific applications, he said manufacturing capacity remains flexible through most of the production process.
“From a fab perspective, not just from a fab, all the way to technology, it is fungible,” El-Khoury said. He cited 1,200-volt silicon carbide products that can be used in automotive 800-volt systems or AI data center applications. The company can make allocation decisions until products are roughly two weeks from completion, he said, compared with lead times of more than 30 weeks for new production.
Utilization Seen Supporting Margins
El-Khoury said onsemi has capacity available and does not need a new capital-expenditure cycle to address current demand. The company raised utilization to 83%, while full utilization is generally in the 92% to 93% range, he said. Capital spending remains planned at a mid-single-digit percentage level.
Chief Financial Officer Thad Trent said utilization is expected to be the primary driver of gross-margin improvement over the next six to 12 months. The company exited the prior year with utilization at 68% before increasing it to 83% last quarter.
According to Trent, each percentage point of utilization improvement contributes roughly 25 to 30 basis points of gross-margin improvement two quarters later. He said onsemi saw margins improve in the second quarter and guided for a significant step-up in the third quarter, with further improvement expected in the fourth quarter and into the following year.
Trent also cited several longer-term margin factors:
- Lower underutilization charges as factory utilization rises toward 92% to 93%.
- About 200 basis points of improvement from the company’s FabRight initiatives.
- Benefits from manufacturing-site divestitures, some beginning in 2027 and more substantially in 2028.
- Potentially favorable product mix and the end of bridge-inventory consumption from prior fab divestitures.
He said the company recorded 650 basis points of underutilization charges in the second quarter. Price increases initiated April 1 and a second round now underway should also provide a near-term tailwind, though the full effect will take several quarters to reach the profit-and-loss statement.
Automotive Inventory Remains Uneven
El-Khoury said automotive restocking has not been consistent, and the company has yet to see a broad replenishment cycle among customers. Industry vehicle-production rates have been flat to slightly down, he said, while inventory has been drawn down across parts of the supply chain.
He said some automotive original equipment manufacturers are becoming more directly involved in purchasing components from onsemi, rather than relying entirely on Tier 1 suppliers to build inventory. Under that arrangement, onsemi ships to the OEM, which then determines which Tier 1 supplier receives the components.
The direct-purchasing model is not yet broad among traditional OEMs, El-Khoury said. However, he described it as already common among Chinese OEMs and North American electric-vehicle companies. He said the model could become more important if automotive demand rises while supply remains constrained by competition for shared power-semiconductor capacity.
AI Data Center Revenue Expected to More Than Double
El-Khoury said onsemi’s AI data center power revenue, defined as revenue generated within AI data centers, is expected to rise from about $250 million last year to more than $500 million this year. Growth is occurring across the data center power tree, rather than in a single component category, he said.
The company historically approached the market from high-voltage power applications, but has gained share across high-, medium- and low-voltage areas, according to El-Khoury. He said onsemi is seeking broad exposure across customers, platforms and geographies, including power-system providers and end customers such as AWS and NVIDIA.
El-Khoury said the company estimates its data center serviceable available market per rack could increase from $15,000 currently to $115,000 by 2030. Of the current figure, he said about 30% is high-voltage content. At the projected 2030 level, high-voltage and medium-/low-voltage content would each account for roughly half, with high-voltage content rising to approximately $55,000 per rack.
He also said onsemi has sampled its high-voltage vertical gallium nitride technology for AI data center and automotive applications. The product is a monolithic 1,200-volt device, and qualification processes are progressing as expected, he said.
Executives Defend Synaptics Transaction
El-Khoury said investor understanding of onsemi’s planned Synaptics acquisition has improved since the announcement, as investors have become more familiar with Synaptics’ transformation over the past five years. He said the acquisition is intended to add an AI-first compute franchise without reducing onsemi’s investment in its core power business.
Trent said the transaction is expected to be accretive to onsemi’s gross-margin target and cash-flow positive. He said onsemi expects to use its scale, distribution network and customer base to broaden deployment of Synaptics products.
El-Khoury reiterated that the company expects $200 million in synergies to make the deal accretive within 18 months, while noting that additional manufacturing, distribution and revenue synergies could emerge beyond that period. He said a high percentage of Synaptics’ non-Astra products could be candidates for internal manufacturing, subject to integration, cost and capital-spending considerations.
About onsemi (NASDAQ:ON)
onsemi is engaged in disruptive innovations and also a supplier of power and analog semiconductors. The firm offers vehicle electrification and safety, sustainable energy grids, industrial automation, and 5G and cloud infrastructure, with a focus on automotive and industrial end-markets. It operates through the following segments: Power Solutions Group, Advanced Solutions Group, and Intelligent Sensing Group. The Power Solutions Group segment offers discrete, module, and semiconductor products that perform multiple application functions, including power switching, power conversion, signal conditioning, circuit protection, signal amplification, and voltage reference functions.
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