On Semiconductor's Q3 2025 Earnings Call: Contradictions Emerge on Automotive Recovery, Gross Margins, and Pricing Strategy

Date of Call: None provided

Financials Results

• Revenue: $1.55 billion, up 6% sequentially vs Q2
• EPS: $0.63 per diluted share (GAAP and non-GAAP), toward high end of range
• Gross Margin: 38% non-GAAP (GAAP 37.9%), above midpoint of guidance
• Operating Margin: 19.2% non-GAAP (GAAP 17.0%)

Guidance:

• Q4 revenue expected $1.48B–$1.58B
• Non-GAAP gross margin expected 37%–39% (includes $8M share-based comp)
• Non-GAAP operating expenses expected $282M–$297M (includes $32M share-based comp)
• Non-GAAP other income net benefit ~$7M; non-GAAP tax rate ~16%; diluted share count ~405M
• Non-GAAP EPS expected $0.57–$0.67; CapEx $20M–$40M
• Guidance assumes no material direct impact from announced tariffs; utilization flat to slightly down in Q4

Business Commentary:

• Automotive Market Stabilization:
• ON Semiconductor's automotive revenue reached $787 million, a 7% increase sequentially, driven by growth in Americas, China, and Japan.

• The stabilization is attributed to the resilience of the company's strategy and demand normalization in automotive and industrial markets.

• Growth in AI Data Center:

• The company's AI data center revenue is estimated to be almost $250 million in 2025, reflecting a 4% share of the overall business.

• Growth is driven by ON Semiconductor's ability to support power delivery from wall to core, providing solutions for AI-optimized data centers.

• Expansion into Vertical GaN:

• ON Semiconductor announced the development of its VGAN platform on proprietary GaN-on-GaN architecture in Syracuse, NY.

• The vertical GaN technology offers higher operating voltages and faster switching, enabling efficient applications in AI data centers, EVs, and aerospace.

• Investment in Trail Platform and Acquisitions:

• The Trail platform has a design funnel exceeding $1 billion, driven by strong customer engagement across automotive, industrial, and AI infrastructure.
• Acquisitions like VCORE are expanding the portfolio and accelerating the roadmap, enhancing performance, reliability, and energy efficiency in AI data centers.

Sentiment Analysis:

Overall Tone: Positive

• Management: "We are pleased... revenue of $1.55 billion, non-GAAP gross margin of 38%, and earnings per share... $0.63." CEO: "we’re seeing stabilization in automotive and industrial while continuing to grow in AI." CFO: results "exceeded the midpoint of our guidance" and highlighted disciplined execution, share repurchases, and strong free cash flow.

Q&A:

• Question from Ross Seymore (Deutsche Bank): What caused the automotive upside this quarter and is that growth sustainable into Q4 and 2026?
  Response: Automotive is stabilizing; the quarter-on-quarter upside reflects seasonality and program ramps rather than a structural restocking — no read into sustainability beyond improved stabilization.

• Question from Ross Seymore (Deutsche Bank): You sized AI at ~$250M for 2025 — how does ON differentiate and how will that grow?
  Response: ON differentiates by delivering end-to-end power delivery (wall-to-core) across high-voltage to point-of-load with a broad product portfolio, positioning it to gain share and grow AI revenue.

• Question from Vivek Arya (Bank of America): Any change to seasonality expectations for Q1 and how should we think about utilization and gross margin impact?
  Response: No change to prior outlook; Q3 utilization rose to 74%, expected flat-to-slightly-down in Q4 as die-bank builds finish; Q1 seasonality typically down ~2–3% with utilization driving gross-margin (~25–30 bps per utilization point).

• Question from Chris Danely (Citi): Any impact from the Nexperia situation on ON's business or customers?
  Response: Too early to quantify any impact; ON is supporting mutual customers as requested and has not redirected strategy or made material changes yet.

• Question from Blaine Curtis (Jefferies): Is the Q4 guide (down ~1%) aligned with normal seasonality or are you undershifting the market?
  Response: Q4 guide aligns with normal seasonality (historically flat to down 2%); expecting auto and industrial down low-single-digits and 'other' up mid-to-high single-digits.

• Question from Quinn Bolton (Needham & Co.): What does the VCORE acquisition bring and will you ship current VCORE products in 2026 or redesign on Trail first?
  Response: VCORE provides near-term products for 2026 revenue and IP that will be integrated into the Trail platform over time to deliver higher-performance, long-term solutions.

• Question from Tore Svanberg (Stifel): How long has vertical GaN been in development and when will it generate revenue?
  Response: Work began after the 2024 IP/asset acquisition; sampling is underway with lead customers in AI and automotive; management expects revenue contribution in the ~2027 timeframe.

• Question from Joe Quartrocchi (Wells Fargo): Any color on silicon carbide revenue growth and traction this year?
  Response: SiC is ramping as expected, ON is gaining share (including China wins such as NIO) and penetration continues to increase across EV and new AI-related PSU applications.

• Question from Harlan Sur (JP Morgan): How large is the mass-market segment via distribution and how did it perform this quarter?
  Response: Distribution is ~58% of revenue; the mass-market subset is roughly a quarter of distribution revenue; ON is building die-bank inventory to support growth while base inventory stays healthy (~112 days).

• Question from Jim Schneider (Goldman Sachs): What would OEMs need to see to begin restocking?
  Response: OEMs need credible end-market demand signals (consumer confidence) and greater geopolitical/logistics stability before committing to restocking.

Contradiction Point 1

Automotive Market Recovery

It involves differing perspectives on the recovery and growth expectations in the automotive market, which are crucial for understanding the company's future performance.

What's the latest on the automotive market, especially Q3's recent growth? What's driving this growth, and is it sustainable? - Ross Seymore (Deutsche Bank)

2025Q3: We are seeing stabilization in the automotive market, which is a positive sign. The sequencing of ramp-ups between quarters doesn't indicate market direction. Growth is expected in 2026 as demand normalizes. - Hassane El-Khoury(CEO)

Where is ON in the automotive recovery cycle? Why is the recovery slow? - Vivek Arya (Bank of America Securities)

2025Q2: Automotive regions outside China weak; exposure and mix differences with peers. Automotive expected to grow in Q3. - Hassane S. El-Khoury(CEO)

Contradiction Point 2

Gross Margin and Utilization Expectations

It involves projections for gross margins and utilization, which are critical financial indicators for the company's performance and operational efficiency.

How will Q4 utilization headwinds impact utilization and gross margins? - Vivek Arya (Bank of America)

2025Q3: Gross margin was 52.2% for the quarter compared to 54.5% in the prior period. Gross margin was impacted by a headwind of approximately 320 basis points from an inventory write-off and about 370 basis points from lower-than-expected production volume. We expect gross margin improvement in the second half of 2026 as we ramp the new acquisitions like VCORE and Trail and drive higher utilization. - Thad Trent(CFO)

What are the current headwinds and tailwinds from cyclical factors, and can you discuss the traction in secular drivers such as AI data centers and Treo? - Ross Clark Seymore (Deutsche Bank)

2025Q2: Gross margin was 57.4% compared to 55.4% in the prior period. Our gross margin improved as expected due to our strategic focus on high-value products and the positive impact we are seeing from our fab divestiture. We expect gross margin improvement in the second half of 2026 as we ramp the new acquisitions like VCORE and Trail and drive higher utilization. - Thad Trent(CFO)

Contradiction Point 3

Automotive Market Stability and Growth

It involves differing perspectives on the stability and growth trends in the automotive market, which are crucial for understanding On Semiconductor's product demand and revenue projections.

Can you update us on the automotive market's Q3 growth, its causes, and sustainability? - Ross Seymore (Deutsche Bank)

2025Q3: We are seeing stabilization in the automotive market, which is a positive sign. - Hassane El-Khoury(CEO)

Why is Q2 sales guidance flat compared to peers' low to high single-digit sequential growth? - Ross Seymore (Deutsche Bank)

2025Q1: We are not seeing a recovery outside of China. - Hassane El-Khoury(CEO)

Contradiction Point 4

Pricing Strategy and Market Dynamics

It raises doubts about On Semiconductor's pricing strategy and market positioning, which can impact revenue and competitive standing.

How do you approach a pricing reset as analog player prices rise? - Gary Mobley (Loop Capital)

2025Q3: Normal pricing behavior is expected. - Thad Trent(CFO)

What caused the shift in pricing strategy from maintaining to low single-digit declines, and is it due to geographic or product factors? - Vivek Arya (Bank of America)

2025Q1: Not geographic or product-specific, but a tool to defend and increase share in future programs. - Hassane El-Khoury(CEO)

Contradiction Point 5

Automotive Market Growth and Stability

It involves differing perspectives on the stability and growth expectations of the automotive market, which is a critical component of ON Semiconductor's revenue.

Can you give an update on the automotive end market, particularly Q3's recent upside, and explain the causes and sustainability of this growth? - Ross Seymore (Deutsche Bank)

2025Q3: We are seeing stabilization in the automotive market, which is a positive sign. The sequencing of ramp-ups between quarters doesn't indicate market direction. Growth is expected in 2026 as demand normalizes. - Hassane El-Khoury(CEO)

What is causing the significant decline in the automotive outlook? - Toshiya Hari (Goldman Sachs)

2024Q4: The decline is primarily noncore business and short-term silicon carbide lumpy-ness, driven by a temporary China demand slowdown due to early New Year and shutdowns. There is still quarter-on-quarter share gain and long-term growth outlook remains unchanged. - Hassane El-Khoury(CEO)