ON Semiconductor Corporation (ON) Earnings

Management highlights

### Overall Demand & Recovery - The industry demand recovery continued through Q2, with broad-based strength across key growth end markets. Multiple indicators including tightening supply, extending lead times, rising within-lead-time orders, and customer escalations confirm a healthy sector recovery - Q2 results exceeded the midpoint of prior guidance, with operating leverage driving accelerated margin expansion and earnings growth; non-GAAP gross margin expanded for the fourth consecutive quarter ### AI Data Center Strategic Progress - AI Data Center is On Semi's fastest growing market, with management now expecting full-year 2026 AI Data Center revenue to more than double 2025 levels (up from prior guidance of doubling) - Secured multiple key design wins: expanded role in the NVIDIA MGX ecosystem for next-generation AI data center power systems; two power supply platform wins with China's Great Wall for cloud and AI infrastructure; design wins for AWS power supply and battery backup systems for U.S. hyperscaler deployments - 2026 silicon carbide revenue for AI data center applications is projected to grow nearly 60% year-over-year, with high-voltage revenue accelerating as the industry transitions to 800-volt DC distribution architectures. On Semi is uniquely positioned as the only broad-based U.S. power semiconductor supplier covering the full power tree from grid to processor ### Industrial & Energy Infrastructure - An "AI halo effect" is driving increased industrial demand for power infrastructure supporting AI deployments, particularly energy storage systems (ESS). Full-year 2026 ESS revenue is expected to grow approximately 40% year-over-year, led by strong growth with North American microgrid customers - Launched next-generation EliteSiC hybrid ESS module with industry-leading 99.3% efficiency, and began sampling the world's highest power density 500 kW hybrid module platform, which delivers 20% higher power density than prior generations at accretive gross margins ### Automotive Growth & Market Share - On Semi is growing content per vehicle via its expanding portfolio of differentiated power, sensing, and connectivity solutions. In China, On Semi's automotive revenue grew 13% year-over-year in H1 2026 even as overall Chinese vehicle sales declined 4%, driven by market share gains in BEVs - Full-year 2026 automotive silicon carbide revenue in China is projected to grow 60-70% year-over-year as new vehicle programs ramp and market share gains continue. In the U.S., On Semi secured power content positions on Rivian's R2 EV platform, supporting both zonal power distribution and onboard charging systems ### Product & Strategy Updates - The Treo analog mixed signal platform, leveraging common technology building blocks across automotive, industrial, and AI infrastructure, is enabling faster innovation and higher margin contributions, with the company on track to double the number of sampling products in 2026 - On Semi announced a planned acquisition of Synaptics, which adds market-leading connected compute capabilities complementary to On Semi's core power, sensing, and control portfolio. The transaction is expected to close in mid-2027, subject to customary regulatory approvals - Completed the final $35 million of planned non-core business exits, bringing total annual non-core revenue exited to approximately $900 million over the past several years, hitting the originally planned target; all non-core exits are now complete - Continued execution of the Fabright (FabRite) strategy, with announced divestitures of underutilized Mountaintop and Philippines manufacturing facilities expected to deliver $35 million in annualized cost savings, with initial benefits starting in 2027 and full savings realized in 2028, representing 50 bps of the planned 200 bps total gross margin improvement from Fabright initiatives ### Financial Operational Highlights - Non-GAAP gross margin hit 39.3% (up 80 bps sequentially), GAAP gross margin was 38.4%. Manufacturing utilization increased to 83% from 77% in Q1, as production ramps to match growing backlog - Generated $425 million in free cash flow, with a record long-term average (LTM) free cash flow margin of 24%. Returned $332 million to shareholders via share repurchases in Q2, with 105% of year-to-date free cash flow returned to shareholders - Inventory declined 9 days to 192 days, with strategic inventory down 8 days; base inventory of 125 days is considered a healthy level to support projected revenue growth

Guidance

- Q3 2026 revenue is guided to a range of $1.65 billion to $1.75 billion - Non-GAAP Q3 2026 gross margin is projected between 40% and 42%, representing significant sequential expansion driven by rising manufacturing utilization - Non-GAAP Q3 2026 earnings per share is guided to a range of $0.81 to $0.93, with midpoint EPS growth expected to outpace revenue growth by nearly 3x - Full-year 2026 capital expenditures are now expected to be below 5% of total revenue, below the company's long-term mid-single-digit target - By segment, Q3 2026 sequential growth is expected to be: automotive up low single digits, industrial relatively flat, and other (driven by AI data center) up high teens - Management expects sequential gross margin expansion through the remainder of 2026 as utilization benefits flow through to the income statement

Segment performance

Total Q2 2026 revenue was $1.6 billion, up 9% year-over-year and 6% sequentially. By business unit: - **Power Solutions Group (PSG)**: $829 million revenue, up 13% quarter-over-quarter and 19% year-over-year, accounting for 51.8% of total revenue - **Analog and Mixed Signal Group (AMG)**: $546 million revenue, up 1% quarter-over-quarter and down 2% year-over-year, accounting for 34.1% of total revenue - **Intelligent Sensing Group (ISG)**: $229 million revenue, down 3% quarter-over-quarter and up 7% year-over-year, accounting for 14.1% of total revenue By end market segment: - **Automotive**: $781 million revenue, down 2% quarter-over-quarter and up 7% year-over-year. Year-to-date 2026 automotive revenue is up 6% year-over-year, with strength in China offsetting European customer seasonality - **Industrial**: $423 million revenue, up 1% quarter-over-quarter and 4% year-over-year, driven by growth in energy infrastructure, medical, and factory automation, partially offset by declines in traditional industrial segments - **Other (anchored by AI Data Center)**: $400 million revenue, up 34% quarter-over-quarter, driven by stronger-than-expected AI data center demand

Risks & headwinds

- Input costs for raw materials and external manufacturing are increasing, requiring a second round of price increases to offset cost pressures; input costs are not expected to decline in 2027, requiring ongoing pricing adjustments - Strong, faster-than-expected demand growth has created short-term capacity allocation constraints, requiring management to prioritize AI data center shipments over automotive and industrial in the short term until manufacturing output catches up - Not all manufacturing capacity is fungible across product lines, creating targeted supply constraints on specific product lanes even as total overall capacity has room to expand - Forward-looking statements and projections are inherently subject to risks and uncertainties that could cause actual results to differ materially from guidance, with key risk factors detailed in the company's SEC filings

Analyst Q&A

• Q: How should investors think about Q3 automotive sequential performance, typical Q4 seasonality, and whether price increases to offset input costs apply to automotive customers? /

  A: Q2 automotive's sequential decline matched typical historical seasonality for the quarter, driven by European customer demand patterns. Demand is currently stable overall, with continued content share gains in North America and China, and Treo and silicon carbide ramping as expected. Price increases to offset rising raw material costs apply across all end markets including automotive, as the cost pressure is universal regardless of customer segment.

• Q: How much more can gross margin expand with rising utilization, and are non-core exits now complete? /

  A: Gross margin improves 25 to 30 basis points for every 1 percentage point increase in utilization, so additional utilization gains through Q4 will drive further margin expansion all else equal. The $35 million Q2 non-core exit was the final planned exit for 2026, bringing full-year 2026 exited non-core revenue to the originally planned $300 million; all planned non-core exits are now complete, with $900 million of annual non-core revenue exited over the past few years hitting the original target.

• Q: AI data center TAM was increased fourfold to ~$50 billion by 2030, what is driving this large adjustment? /

  A: The TAM increase is driven by two main factors: first, projected total installed gigawatt-scale power capacity for AI data centers by 2030 is much higher than prior projections, which translates directly to higher semiconductor content when multiplied by On Semi's content per rack. Second, On Semi has developed and launched new products in adjacent power market segments that did not exist when the prior TAM was calculated, including new silicon carbide devices, solid state circuit breakers, and Treo platform solutions that expand the company's addressable opportunity across all core end markets.

• Q: What is the current level of customer inventory building, and what is the outlook for input costs and pricing in 2027? /

  A: On Semi is not seeing customer inventory build at this stage of the recovery, and the company is maintaining discipline around channel inventory, with inventory levels continuing to decline across the business consistent with shipping to true end demand. Input costs are not expected to decrease in 2027, and the company already has visibility into ongoing cost increases, so pricing is not expected to soften in 2027, with ongoing adjustments to offset persistent cost pressure.