Executive Summary / Key Takeaways

• ON Semiconductor is executing a multi-year strategic transformation, pivoting towards high-growth, high-margin intelligent power and sensing solutions for the automotive, industrial, and AI data center markets.
• First Quarter 2025 results reflected ongoing market softness, with significant year-over-year revenue decline and a GAAP net loss driven by substantial restructuring charges and inventory write-offs, although non-GAAP results exceeded guidance midpoints.
• The company is undertaking aggressive operational realignment, including a 12% reduction in internal fab capacity and a 9% workforce reduction, to structurally lower costs and enhance gross and operating margins for future market recovery.
• Key technology differentiators like EliteSiC (including new Trench and acquired JFET technology), advanced image sensors, and the new Treo analog/mixed-signal platform are driving design wins and positioning ON for disproportionate growth in target markets like China EVs and AI data center power.
• Despite near-term demand uncertainty and competitive pricing dynamics, ON is generating strong free cash flow, reducing capital intensity, and is committed to returning 100% of free cash flow to shareholders in 2025, signaling confidence in its long-term financial model and strategic direction.

Setting the Scene: A Transformed ON Semiconductor

ON Semiconductor Corporation operates at the intersection of intelligent power and sensing technologies, providing critical solutions that enable efficiency and performance in an increasingly electrified and automated world. Under the onsemi™ brand, the company has undergone a significant transformation since the fourth quarter of 2020, strategically shifting its focus away from commoditized, price-sensitive markets towards high-growth megatrends: automotive electrification, industrial automation, and the burgeoning demands of AI data centers. This pivot is not merely a change in market focus but a fundamental reshaping of the business model, prioritizing value creation through differentiated products and operational excellence.

Central to this transformation is ON's portfolio of advanced technologies. In intelligent power, Silicon Carbide (SiC) stands out, with ON offering its EliteSiC platform, including the latest fourth-generation Trench MOSFETs and the recently acquired SiC JFET technology from Qorvo (QRVO). These technologies provide tangible, quantifiable benefits: SiC enables lighter, longer-range electric vehicles through superior energy efficiency in traction inverters and fast-charging systems. The acquired SiC JFET technology, specifically, offers the lowest ON resistance in high-current solutions, making it essential for the transition to higher power density (3kW to 5kW) power supply units (PSUs) in AI data centers. Complementing SiC are advanced silicon power devices like the T10 PowerTrench MOSFETs, known for industry-leading ultra-low RDS(on) and reduced switching losses, critical for efficiency across the power tree. In intelligent sensing, ON's image sensors, such as the 8-megapixel solutions, are gaining traction in automotive ADAS systems, providing the high performance needed for advanced vehicle safety. The acquisition of SWIR Vision Systems further expanded sensing capabilities into short-wavelength infrared technology for industrial and defense applications. Looking ahead, the new Treo platform, built on advanced BCD 65nm technology, represents a significant R&D initiative. Designed for high-performance analog and mixed-signal applications across a wide 1V to 90V range, Treo aims to accelerate product development and proliferation, targeting a $36 billion total addressable market (TAM) opportunity with an accretive gross margin profile of 60-70%. These technological differentiators are not just features; they are foundational to ON's strategy, providing a competitive moat by enabling customers to achieve higher system-level performance and efficiency, thereby justifying a value-based pricing approach rather than competing solely on cost.

In the competitive landscape, ON faces established players like Analog Devices (ADI), Texas Instruments (TXN), and NXP Semiconductors (NXPI), who also operate in power, analog, and sensing markets. While these competitors offer broad portfolios, ON is strategically positioning itself as a leader in specific high-value niches driven by its differentiated technology. For instance, in SiC, ON's performance advantages are key to winning designs against both global peers and emerging local vendors in markets like China, where performance and system-level benefits outweigh simple component pricing. Financially, while competitors like ADI and TXN historically exhibit higher gross and operating margins, reflecting their scale and potentially more optimized cost structures, ON's strategic shift and focus on higher-margin products like SiC and Treo aim to close this gap and drive its own profitability towards its long-term targets.

Navigating the Downturn: Recent Performance and Operational Realignment

The macroeconomic environment continues to present challenges, characterized by an extended downturn, persistent inventory digestion across end markets, and customer caution amplified by geopolitical uncertainties. This difficult backdrop significantly impacted ON's recent financial performance.

For the first quarter of 2025, ON reported revenue of $1.45 billion, a decrease of approximately 22% compared to $1.86 billion in the first quarter of 2024. This decline was broad-based across segments, with Power Solutions Group (PSG) revenue decreasing by 26% year-over-year to $645.1 million, Analog and Mixed-Signal Group (AMG) revenue down 19% to $566.4 million, and Intelligent Sensing Group (ISG) revenue down 20% to $234.2 million.

The impact on profitability was substantial. GAAP gross profit plummeted to $293.8 million (20.3% margin) from $853.6 million (45.8% margin) in the prior year quarter. This was heavily influenced by significant restructuring, asset impairments, and other charges, net, totaling $539.3 million in Q1 2025, compared to just $1.4 million a year ago. These charges included $431.5 million in non-cash asset impairment charges related to manufacturing equipment classified as held-for-sale and $60.2 million in severance costs as part of a global workforce reduction. Furthermore, the cost of revenue included $237.7 million in excess and obsolete inventory charges, with $232.2 million specifically related to work-in-progress inventory within the ISG segment due to changes in business strategy. GAAP operating expenses also surged to $867.5 million from $328.4 million year-over-year due to these charges, resulting in a GAAP operating loss of $573.7 million and a GAAP net loss attributable to ON Semiconductor Corporation of $486.1 million, or $1.15 per diluted share.

Despite the GAAP losses reflecting these strategic, non-cash charges, the underlying operational performance, measured by non-GAAP metrics, demonstrated resilience and exceeded guidance midpoints. Non-GAAP gross margin was 40.0%, down from 45.3% sequentially and 45.8% a year ago, primarily due to lower revenue, under-absorption from reduced manufacturing utilization (60% in Q1 2025, up slightly from 59% in Q4 2024), and unfavorable product mix. Non-GAAP operating expenses were $315 million, relatively flat year-over-year, reflecting active cost control. Non-GAAP diluted earnings per share was $0.55, down from $1.08 in Q1 2024.

In response to the persistent market weakness and to structurally enhance its cost structure for the long term, ON initiated the 2025 Manufacturing Realignment Program in Q1 2025. This program involves reducing internal fab capacity by 12% and reducing the global workforce by approximately 2400 employees (about 9%). These actions are designed to realign manufacturing capacity with anticipated long-term needs and drive sustainable efficiencies. Management expects these structural changes to yield approximately $25 million in OpEx savings in Q2 2025 compared to Q1, with an additional $5 million per quarter in savings in the second half of the year. Furthermore, the manufacturing realignment is expected to reduce ongoing depreciation costs by approximately $22 million on an annualized basis, with the benefit starting to impact the income statement in the fourth quarter of 2025. These measures, while resulting in significant near-term charges, are critical steps aimed at improving operating leverage and positioning the company for margin expansion when the market eventually recovers.

Strategic Growth Pillars and Technological Leadership

Despite the cyclical downturn, ON continues to invest in and execute on its strategic growth pillars, leveraging its technological leadership to capture future market opportunities.

Automotive: The automotive market, particularly electric vehicles (EVs), remains a core focus. While inventory digestion and slower-than-anticipated EV sell-through (especially outside China) have impacted near-term demand, the long-term trend towards electrification and increasing semiconductor content per vehicle remains intact. ON's SiC solutions are critical here. The company has secured a new design win for its 750V SiC in a plug-in hybrid electric vehicle (PHEV) platform with a major U.S. OEM, signaling broader SiC adoption beyond full BEVs. In China, a leading EV market, ON expects to have its SiC in nearly 50% of new models ramping in late 2025, including PHEVs. This penetration is driven by the superior performance of ON's SiC, which enables OEMs to extend vehicle range and reduce system costs. In intelligent sensing for automotive, ON is winning designs for its 8-megapixel image sensors with leading OEMs in China and Asia for ADAS systems, highlighting the value of its high-performance sensing technology.

AI Data Center: The rapidly growing AI data center market presents a significant opportunity for ON's intelligent power solutions. As power requirements per rack escalate, the need for highly efficient power delivery across the entire power tree becomes paramount. ON is addressing this with a combination of SiC and advanced silicon. The acquired SiC JFET technology, combined with T10 Trench FETs, provides a winning high-power AC-to-DC solution for PSUs and battery backup units (BBUs). SiC JFETs are essential for the transition to 5kW PSUs, offering the lowest ON resistance. ON is already ramping with a large U.S. hyperscaler, securing a majority share in their PSU and BBU. The company is also capitalizing on the transition to modular UPS systems with its EliteSiC power modules and expects UPS revenue to grow between 40% and 50% for the full year 2025. Beyond the entry point, ON is expanding its portfolio with FETs and power management ICs for intermediate bus conversion and Vcore power delivery to CPUs and GPUs, securing design wins with three of the top four hyperscalers in North America expected to contribute revenue in 2025.

Industrial: While the traditional industrial market is still undergoing inventory digestion, ON is seeing early signs of stabilization and recovery in certain pockets, including medical and aerospace and defense, which increased sequentially in Q1 2025. The company's SiC and power management solutions are gaining traction in areas like renewable energy (utility-scale solar, energy storage) and HVAC, driven by the need for higher efficiency and power density. The Intelligent Sensing Group is also proliferating its portfolio for industrial imaging applications like machine vision and robotics, leveraging acquisitions like SWIR Vision Systems for differentiated technology.

Treo Platform: The Treo platform is a key enabler for accelerating portfolio expansion and capturing high-margin opportunities across automotive, medical, industrial, and AI data center markets. This platform allows for faster development and delivery of innovative analog and mixed-signal solutions. ON has already recognized the first production revenue from Treo and is on track to double the number of products available year-over-year, building towards its stated goal of $1 billion in revenue from this franchise by 2030.

Financial Strength and Capital Allocation

Despite the challenging operating environment and significant restructuring costs, ON maintains a solid financial position and is focused on disciplined capital management. As of April 4, 2025, the company held approximately $3.0 billion in cash and short-term investments. Its Revolving Credit Facility provides an additional $1.1 billion in available liquidity. The company has no meaningful debt maturing in the next 12 months and remains in compliance with its debt covenants.

ON demonstrated strong free cash flow generation in Q1 2025, reaching $455 million, a 72% increase year-over-year, representing a robust 31% of revenue. This was driven by $602.3 million in cash flow from operations, which benefited from favorable working capital movements despite the lower net income. Capital expenditures in Q1 2025 were $147.6 million, approximately 10% of revenue. Management expects capital expenditures to decrease to approximately 5% of revenue for the remainder of 2025, aligning with its long-term capital intensity target in the mid-single-digit percentage range. This reduced capital intensity, a result of prior investments and improved manufacturing efficiency, is expected to support strong future free cash flow generation, targeting a 25% to 30% free cash flow margin.

Confidence in future cash flow generation underpins ON's commitment to returning capital to shareholders. The company repurchased approximately $300.1 million of common stock in Q1 2025 and has increased its share repurchase target to 100% of free cash flow for 2025. Approximately $1.5 billion remains authorized under the current share repurchase program. This aggressive capital return strategy, coupled with disciplined operational management, highlights management's focus on enhancing shareholder value through the cycle.

Outlook and Investment Implications

ON's guidance for the second quarter of 2025 reflects the continued cautious market environment. The company anticipates revenue in the range of $1.4 billion to $1.5 billion, essentially flat at the midpoint compared to Q1 2025. Non-GAAP gross margin is guided to be between 36.5% and 38.5%, a sequential decline primarily due to increased non-cash under-absorption charges (estimated 900 basis points headwind) resulting from slightly lower expected utilization levels in Q2, and low single-digit pricing declines in certain areas. Non-GAAP operating expenses are expected to decrease to $285 million to $300 million, reflecting the initial benefits of the restructuring actions. This translates to a non-GAAP earnings per share guidance of $0.48 to $0.58. Capital expenditures are expected to decrease significantly to $70 million to $90 million in Q2.

Management maintains an "L-shaped" view of the market recovery, indicating that while some pockets show signs of stabilization, a broad-based rebound is not yet visible. The near-term outlook is characterized by persistent inventory digestion and customer caution. However, the strategic actions taken in Q1 2025 are expected to create a tailwind when demand recovers. The reduction in fixed costs from manufacturing realignment and OpEx reductions will lead to significant operating leverage as utilization rates improve. Management expects depreciation savings to begin impacting the P&L in Q4 2025, contributing to future margin expansion towards the long-term target of 53%.

The investment thesis for ON Semiconductor hinges on its successful execution of the strategic transformation and its positioning in high-growth, high-margin markets driven by differentiated technology. The company's focus on automotive electrification, AI data center power, and industrial automation, supported by its SiC, advanced silicon, and Treo platforms, provides a clear path for long-term growth and market share gains against competitors. The aggressive cost reduction initiatives, while painful in the short term, are necessary steps to improve profitability and free cash flow generation through the cycle.

However, risks remain. The timing and strength of the market recovery are uncertain, and a prolonged downturn could further pressure revenue and margins. Competitive pricing pressures, particularly in certain segments, could erode profitability if not fully offset by cost reductions and value-based pricing. Geopolitical factors and potential tariff impacts, while currently assessed as minimal direct risk, could create indirect disruptions. Ongoing litigation, including the securities class action related to the SiC business, adds a layer of uncertainty. The success of new product ramps and the adoption rate of technologies like SiC in EVs and AI data centers are critical variables.

Conclusion

ON Semiconductor is in the midst of a profound strategic transformation, shedding its legacy identity to become a focused provider of intelligent power and sensing solutions for the future's most dynamic markets. The first quarter of 2025 highlighted the challenges of this transition during a cyclical downturn, marked by significant restructuring costs and revenue contraction. Yet, beneath the surface of GAAP losses, the company demonstrated operational resilience, exceeded near-term guidance, and took decisive actions to structurally improve its cost base. The core investment thesis is centered on ON's differentiated technology portfolio, particularly in Silicon Carbide and advanced analog/mixed-signal platforms like Treo, which are driving design wins and positioning the company for leadership in automotive electrification and AI data center power. While the timing of a broad market recovery remains uncertain, ON's aggressive cost reduction program, disciplined capital allocation, and commitment to returning free cash flow to shareholders underscore management's confidence in the long-term value creation potential. The success of this transformation and the realization of margin expansion will depend on the effective execution of strategic initiatives and the eventual return to growth in its target markets, making ON a compelling, albeit cyclical, opportunity for investors focused on the future of intelligent power and sensing.