Good day and thank you for standing by. Welcome to the On Semi second quarter 2026 earnings conference call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. I would now like to hand the conference over to your speaker today, Farag Agarwal, Vice President of Investor Relations and Corporate Development.

Thank you, Josh. Good afternoon, and thank you for joining OnSami's second quarter results conference call. I'm joined today by Hassan El Khoury, our President and CEO, and Thay Tran, our CFO. This call is being webcast in the Investor Relations section of our website at www.onsami.com. A replay of this webcast, along with our second 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 30 days following this conference call. Additional information is posted on the Investor Relations section of our website. Our earnings release and this presentation includes 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'll 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. 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 case, Form 10 queues, and other filings with the Securities and Exchange Commission, and in our earnings release for the second quarter. I would estimate other or other forward-looking statements might change, and the company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions, or other events that may occur, except as required by law. Now, let me turn it over to Hassan.

Hassan. Thank you, Purghag. Good afternoon, and thank you for joining us on the call. Our second quarter results reflect the progress we have made in reshaping the business and our technology portfolio over the past several years and the strengthening demand environment. As we anticipated, the recovery continued to take shape during the quarter with continued strength in our AI data center business. We also saw multiple indicators of strengthening demand with China, BEVs in automotive, for example, and energy infrastructure and medical and industrial already showing overmarket Supply is tightening in several growth areas, lead times are extending, and we are seeing increases in both orders placed within lead time and customer escalations, all signs of a healthy recovery across the board. In Q2, we delivered $1.6 billion of revenue, non-GAAP gross margin of 39.3%, and non-GAAP diluted earnings per share of 74 cents, all above the midpoint of our guidance. These results reflect the operating leverage in our model, with recovering demand driving accelerated margin expansion and earnings growth. AI Data Center remains our fastest growing market. We now expect AI Data Center revenue to more than double in 2026, driven by stronger demand, further accelerated by broader customer wins, and expanding content across the entire power tree. We have expanded our role in the NVIDIA MGX ecosystem to supply advanced power systems designed to support the next generation of AI data centers, broadening the number of platforms where our intelligent power solutions are designed in. In addition, we secure two power supply platform wins with Great Wall, a leading provider of power solutions for China's cloud and AI infrastructure market. In parallel, we continue to add content in U.S. hyperscalers' AI deployments with design wins supporting AWS power supply and battery backup systems. These wins create additional content opportunities for our differentiated high-voltage power portfolio, including silicon carbide solutions, and reflect the value of our higher power efficiency and superior power density in next-generation AI power architectures. In 2026, we expect our silicon carbide revenue in AI data center applications to grow nearly 60% year-over-year. We expect our high-voltage revenue to accelerate as power requirements continue to rise and system architectures evolve towards 800-volt DC distribution, driving greater adoption of our intelligent power solutions from high-voltage infrastructure through low-voltage power delivery. As the only broad-based U.S. power semiconductor supplier with technologies spanning the full AI power tree, we are uniquely positioned to support this transition from the grid all the way to the processor. Importantly, this is not a position we earned overnight. It is the results of years of investment in solving complex power challenges, particularly in automotive, where power efficiency, thermal management, reliability, and system integration have long been critical design requirements. Our opportunity extends beyond the data center into the power infrastructure required to support AI deployments. In our industrial business, we are increasingly seeing the benefits of the AI halo effect, where AI growth is driving demand across the power infrastructure required to support it, including energy storage systems, or ESS. We expect our ESS revenue to grow approximately 40% year-over-year in 2026, driven by higher year-over-year growth in North America with microgrid customers. During the quarter, we released our next-generation EliteSIC hybrid ESS module, delivering industry-leading 99.3% efficiency. We also began sampling our industry-first and the world's highest power-density hybrid module platform at 500 kilowatts, which increases power density by 20% compared to our previous platform, delivering growth at accretive gross margins. Growth in AI workloads and increasing grid reliability and resilience requirements are expanding our industrial portfolio into higher-value infrastructure markets with greater semiconductor content. Turning to automotive, we continue to expand our content per vehicle through a growing portfolio of differentiated power, sensing, and connectivity solutions. In China, our automotive revenue increased 13% in the first half of 2016 over the same period last year, against a total vehicle sales number that was down 4%, supported by expanding content per vehicle with customers like Geely Ziker and Xiaomi. With our market share gains in China EVs, we now expect silicon carbide revenue in that market to increase between 60% and 70% year-over-year as our market share gains continue and programs ramp across existing platforms and newer vehicle launches. In the U.S., we continue to gain share across EV disruptors, with a recent example of our power content on Rivian's R2 platform, where our MOSFETs support power distribution throughout the vehicle's zonal controller architecture, while our silicon carbide solutions are deployed in the onboard charging system. These wins highlight our ability to participate across multiple vehicle domains as EV architectures continue to evolve. The demands of next-generation vehicle architecture around efficiency, power density, and reliability increasingly mirror the challenges being addressed in AI infrastructure and energy systems, enabling OnSemi to leverage decades of power expertise across multiple growth markets. A growing share of our recent design wins are coming from products introduced over the last two years, including our 10-base T1S Ethernet offering and our inductive on ultrasonic sensing products, reflecting the increasing contribution of Treo, our analog mixed signal platform at favorable margins. By leveraging common technology building blocks across automotive, industrial, and AI infrastructure applications, Trejo enables faster innovation cycles and more efficient product development. We remain on track to double the number of products sampling this year, further strengthening our pipeline, and positioning us to capture additional content opportunities as vehicle architectures evolve. Over a multi-year period, we expect to outgrow underlying vehicle production through content expansion, technology leadership, and share gains. More broadly, across automotive, industrial, and AI data center, the industry is moving toward architectures requiring higher level of power efficiency, power density, and system intelligence, all of which place greater demands on power conversion, delivery, and management. This is what we do. As we look ahead, our confidence in the second half is grounded in the momentum we are seeing across our key growth drivers. We now expect AI data center revenue to more than double for the year. At the same time, the AI halo effect continues to create incremental growth opportunities across energy infrastructure, where we expect ESS revenue to grow by approximately 40% this year. In automotive, we continue to gain content and share, particularly in China, where automotive silicon carbide revenue is expected to grow between 60% and 70%. As I wrap up, I want to highlight our announced agreement to acquire Synaptics. Beyond the compelling strategic and financial rationale, we are excited about the opportunities this combination creates for all shareholders. Synaptics' market-leading connected compute capabilities complement our strength and power, sensing, and control at accretive gross margins. Our combination would leverage our manufacturing scale, global sales channel, and mass market engine to drive growth across our highly complementary portfolio. We expect the transaction to close in mid-2027, subject to customary approvals. Let me now turn the call over to Thad to provide more details on our results and guidance for the third quarter. Thanks, Hassan.

Our second quarter results demonstrate the operating leverage in our model, with revenue up 9% year-over-year and non-GAAP earnings per share growing approximately four times faster than revenue. Free cash flow nearly quadrupled and non-GAAP gross margin expanded for the fourth consecutive quarter. This reflects the earnings power of our focused portfolio, the benefits of our manufacturing cost actions, and we are entering the second half of the year from a position of strength as demand continues to recover. Our results were above the midpoint of our guidance range as we delivered revenue of $1.6 billion, driven by increasing demand in AI data center. Non-GAAP gross margin expanded 80 basis points sequentially to 39.3%, while non-GAAP earnings per share increased to 74 cents. We generated $425 million of free cash flow in Q2 and returned $332 million to shareholders through share repurchases. Year-to-date, we have returned approximately 105% of free cash flow. Our ability to simultaneously invest for growth, expand profitability, and return capital reflects the structural improvements in our business and differentiates on CIMI today. Turning back to revenue for the quarter, Q2 revenue was $1.6 billion, up 6% sequentially and above normal seasonality, even as we completed the final $35 million of planned non-core revenue exits. Across the business, our overall book-to-bill ratio has been significantly above one for several quarters and continued to strengthen. Given the accelerated ramp in AI data center demand, we prioritize shipments to AI data center over automotive and industrial. We expect this to normalize as supply rebalances to match demand. Automotive revenue was $781 million in the second quarter, down 2% quarter-over-quarter, and grew 7% year-over-year. Consistent with previous years, the sequential decline was primarily driven by specific customer seasonality in Europe, offset by strength in China. Year-to-date, automotive revenue increased approximately 6% compared to 2025. Industrial revenue was $423 million, up 1% sequentially and 4% year-over-year, driven by strength in our focus areas of energy infrastructure, medical, and factory automation, partially offset by declines in traditional part of the industrial market. Total revenue for the other category in the second quarter was $400 million, up 34% sequentially, anchored by stronger-than-expected AI data center demand, as well as growth in other end markets. Our AI data center business continued to grow in Q2, and 2026 is now on pace to more than double compared to 2025. Looking at the second quarter split between the business units, revenue for the Power Solutions Group, or PSG, was $829 million, an increase of 13% quarter-over-quarter and 19% year-over-year. Revenue for the Analog and Mixed Signal Group, or AMG, was $546 million, an increase of 1% quarter-over-quarter and 2% decrease year-over-year. Revenue for the Intelligent Sensing Group, or ISG, was $229 million, a 3% decrease quarter to a quarter, and a 7% increase over the same quarter last year. Moving to gross margin, gap gross margin was 38.4%, and non-gap gross margin was 39.3%, an increase of 80 basis points sequentially. We benefited from improved manufacturing performance and favorable mix. Utilization increased to 83% from 77% as we continue to quickly ramp production to support the increasing backlog for future quarters. In Q3, we expect utilization to be flat to up. We are seeing incremental increases in input costs, primarily in raw materials and external manufacturing. We are implementing a second round of price increases to offset these costs and expect to see the benefit over the next several quarters. The announced divestitures of our mountaintop and Philippines manufacturing facilities further advances our FabRite strategy of exiting subscale legacy operations to improve our cost structure. We expect approximately $35 million of annualized savings with the initial benefit starting in 2027 and the full savings realized in 2028. This represents approximately 50 of the 200 basis points of gross margin improvement from our planned Fabright initiatives. Gap operating expenses were $358 million, including $41 million in restructuring expenses, and non-gap operating expenses were $297 million. dollars. Gap operating margin for the quarter was 16.1 percent, and non-gap operating margin was 20.8 percent. Our gap tax rate was 16 percent, and non-gap tax rate was 15 percent. Gap earnings per share was 56 cents. Non-gap earnings per share was 74 cents, a 16 percent increase over the prior quarter. Gap share count was 404 million shares, and non-gap share count was 397 million shares. Turning to the balance sheet, cash and short-term investments was approximately $3.9 billion, with total liquidity of $5.4 billion, including 1.5 undrawn on a revolver. Cash from operations was $460 million, and free cash flow was $425 million. We achieved record free cash low margin on an LTM basis of 24%. Capital expenditures were $34 million, or 2.1% of revenue. Inventory declined nine days to 192 days, and flat on a dollar basis. As expected, we continue to drain our strategic inventory, which is down eight days. Our base inventory declined one day to 125 days, reflecting a healthy level of inventory supporting our expected revenue growth. Distribution inventory declined to 10.1 weeks from 10.8 in Q1, with sell-through, outpacing, sell-in, and our mass market revenue increased 20% sequentially. Looking forward, let me provide the key elements of our non-GAAP guidance for the third quarter. As a reminder, today's press release contains a table detailing our GAAP and non-GAAP guidance. We anticipate P3 revenue will be in the range of $1.65 billion to $1.75 billion. Our non-GAAP gross margin is expected to be between 40 and 42%, which includes share-based compensation of $8 million. This represents a significant step-up function increase as we realize the benefit of increasing utilization since the start of the year. Given the improving demand outlook, we expect sequential gross margin expansion throughout the year. Non-GAAP operating expenses are expected to be between $303 and $318 million, which includes share-based compensation of $33 million. Operating expenses are expected to increase at a slower pace than revenue, supporting continued operating leverage as we grow into our model. We anticipate our non-GAAP other income to be a net benefit of $18 million with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 15% and our non-GAAP share count is expected to be approximately 395 million shares. This results in non-GAAP earnings per share in the range of $0.81 to $0.93. cents. At the midpoint, EPS growth would outpace revenue by nearly 3x. We expect capital expenditures in the range of $40 to $50 million, and we now expect capital expenditures for the year to be below 5% of revenue. In closing, the actions we have taken to reshape the company have created a structurally stronger and more efficient business, and we believe we are still in the early stages of realizing the full benefit of our model. We are entering the second half of the year from a position of strength. With a stronger demand environment, a more focused portfolio, and additional manufacturing efficiency is still ahead of us, we remain confident in our ability to drive sustainable value for our shareholders. We look forward to sharing more with you during our Analyst Day in New York on September 16th. With that, I'll turn the call back over to Josh to open it up for questions.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for questions. Our first question comes from Vivek Aria with Bank of America Securities. You may proceed.

Thanks for taking my question. Hassan, I was hoping you would give us some more color on the automotive environment. Sales were down slightly sequentially, and maybe some of it was because of exits, but how should we think about, in the context of the 6% sequential you're guiding, how you expect your automotive business to do in Q3, and then what is kind of the typical seasonality in Q4? And the reason I want to ask about autos is that does the pricing lever apply to autos also? Because I imagine you are exposed to large OEMs and Tier 1s. So do you get the same benefit of pricing even when dealing with automotive customers? So just, you know, commentary on demand and pricing and sequentials would be helpful.

Yeah, let me – there's a lot to unpack here, Vivek. So let me take it, and if I miss any, just prompt me again. So overall, the quarter came in exactly as we expected. We still believe we're shipping to true demand now. You know that the inventory is behind us. So that's what we see as true demand. Of course, regionally, automotives behave very, very differently. You know, I talked about some of the strength with share gains in North America. China is doing very well for us. All came in kind of where we expected. Q2 for us, if you look historically in 24 and 25, Q2 is a seasonally typically down quarter. I think the numbers for the last few years have been like 11% down and a 4% down. So Q2 is, again, seasonality given a couple of key customers in Europe specifically. Outside of that, we see the demand environment kind of stable. We see us maintaining our content gains with new products we are introducing, whether it's the Treo starting to ramp in some of the zonal architectures already, or silicon carbide, which we are expecting growth with a stellar growth coming out of China. Again, based on the competitive nature of the share gains I have talked about here on these calls. So overall, we see automotive kind of, how do you say, very stable with a good outlook. As far as the pricing is concerned, pricing for us is not really market-driven because the cost increases that we are seeing are, I'm going to call it, you know, material in nature. Material meaning, you know, substrates or gold or a lot of it applies regardless of market. And therefore, yes, our pricing actions that Thad and I both talked about last quarter are offsetting those costs across all of our markets. We do have some surgical cost increases where we see strength or we see really allocation. But in general, where we're offsetting cost, that's across the board, including automotive.

Thank you, Sam. For my follow-up, maybe one for Thad on gross margins. So the gross margins went up about 80 basis points, although I think utilization you mentioned went up almost 800 basis points. So is it that a bulk of that benefit you get to see in Q3? You know, what kind of utilization should we assume for Q3? And what is the effect of mix and pricing? And I ask these questions because if I go back to the levels of revenue we saw for on, towards the end of 2024, it was in this 1.7-ish billion quarter range, and your gross margins were already in the mid-40s. I imagine that was a different time versus what we have. So just help us think through the effect of utilization, mix, and pricing for your current trajectory of gross margins.

Yeah, Vivek, for the Q2 gross margin, you actually need to go back and look at the Q4 utilization, because remember there's about a two-quarter for utilization to hit the P&L. So in Q4, utilization actually dropped six percentage points from Q3 to Q4. So that would have been a headwind to Q2. So we actually offset that headwind with favorable mix primarily, and we saw that coming because our guide was 39%. We came in at 39.3%, so better than we expected, but we saw that favorable mix that we guided to. There really wasn't much of a margin impact at all from pricing because of the input costs that Hassan just walked through. So you can think about anything we did in pricing in the second quarter really didn't give a bump to the gross margin. The utilization increase now here in Q2 that we see going up will obviously impact us in the future quarters, right? So you can think about Q2 hitting Q4. So that's why we're very confident that you'll see additional gross margin expansion through the rest of the year as utilization has been consistently going up since Q4. So as the market improves, as the utilization continues to go up, as we catch up supply to demand just because demand has moved so quickly, we'll be able to see that benefit coming through the P&L for the remainder of the year.

Thank you. Our next question comes from Timothy Arcuri with UBS. You may proceed.

Hi, thanks a lot. Fad, I just wanted to follow up on that comment on utilization tailwind to gross margin. So is the right rubric still to think like 30 bips per point of utilization? So all things equal between now and Q4, the increase in utilization should drive margin up by, I don't know, 150 to 200 basis points. Is that kind of the right way to think about it?

Yeah, the math is 25 to 30 basis points of gross margin improvement for every point of utilization. So as we look into Q4, yes, you should expect a margin increase, all things being equal. You know, that's assuming a consistent mix, those types of things. Now, again, we had a richer mix here in Q2, so just keep that in mind. We saw that coming. But yes, we will see additional margin expansion in Q4.

Okay, and then just with respect to the exits, So I think you exited 35, you said, in the second quarter.

Can you just talk about do you still see $300 million for the full year? It sounded like you made a comment that it's done now, that the exits are done. So can you just walk through all that?

Yeah, the exits are done. So the $35 million was the Q2 impact. So if you take what we did for Q1, Q2, and you annualize it, you get to roughly about $300 million for the year because obviously those don't repeat in Q3 and Q4.

So the exits are behind us now.

We won't be talking about that going forward. It was 35 for the quarter, and that's it for the year. And that really, if you go back to when we mapped this out, it's about $900 million of annual revenue that we've exited over the last few years. So right on target to what we expected.

Okay, thanks. Thank you. Our next question is from Joe Quattrochi with Wells Fargo. you may proceed.

Yeah, thanks for taking the question. You talked about, like, prioritizing data center demand over auto industrial of the quarter. Was that any sort of impact to revenue, or how do we think about that dynamic?

Yeah, I mean, obviously, when we have some technologies specifically in power where we have constrained, we did see some orders come in, what I would say, within lead time, and we had to make priority calls. So, we did shift some, not just automotive specifically, but we did prioritize AI data center that took away from our other businesses in the short term as manufacturing really catches up to the updated signals of demand. So we made those calls within the quarter. You saw that strength in AI data center. We expect that AI data center, of course, to continue strength during the year. So it's not just a temporary Q2, meaning we got the gain, we got the designs, we will continue to ramp, and then our manufacturing output will catch up to the, call it automotive and industrial. So overall, we made those calls within the quarter. That's the long-term beneficial for the company, and we didn't have really a customer impact in the short term, but it is something that we're catching up to here in the third and fourth quarter.

Thanks. And then just maybe as a follow-up, any sort of help in just thinking about the sub-segments of the business looking into 3T on the guidance front?

Yeah, as you look forward, we expect auto to be up low single digits, industrial to be relatively flat, and we expect other, which has our AI data center, to be up high teams. Those are all percentage-wise.

Thank you.

Thank you. Our next question comes from Quinn Bolton with Needham & Company. You may proceed.

I guess thanks for letting me ask you a question. I guess maybe just following up on that sort of guide, other it was up $100 million sequentially. It looks like it'll be up, you know, several tens of millions. But the third quarter guide, that certainly implies a pretty healthy AI data center business. I know you guys are saying it's going to more than double, but is it going to be significantly higher than the previous $500 million target you talked about last quarter? I mean, how much better than 500 million do you think you can do? Certainly, it seems like if all of the strength and other in Q2, Q3 is coming from AI data center, you've got a much bigger data center business than 500.

I'll let you run the numbers, but, I mean, the fact that we started with not disclosing to Dublin, now more than doubling, I would just say highlights the momentum we are gaining, which is not a surprise. We've always said the AI data center is coming in exactly where our technology is the most competitive, and we're going to win on the baseline of our technology, and that's what you're seeing. We're not breaking it up beyond that at this point, but we are seeing strength, and like you said, it is sustained strength. It's not a quarterly strength. And by the way, just projecting more forward, forward-looking, as we get to the 800-volt DC transition, that's going to fuel more of our content. So we're excited about where we are. Our investments have delivered to the market today, and our investment will continue to deliver in that market.

Thanks. As a follow-up question, I think in the prepared comments you mentioned that, I think you said it was your North American silicon carbide business for data center PSUs would be of 60 to 70%. I guess I would have thought that silicon carbide was one of your lead products in the data center business, which is now likely to more than double year on year. And so just wondering, was that comment specific to North America, or is there a reason silicon carbide may be growing slower than the rest of the data center business, or maybe asked in a different way, what's leading the growth in data center if it's not silicon carbide-based?

Yeah, you know, I've always said our growth in data center is literally from the wall to the core. We do not have a single technology that is an outsized across the power tree, which gives us a very good distribution from, you know, what I call the high voltage, because it's not only silicon carbide MOSFETs, we have silicon carbide JFETs, and we have silicon as well, all the way to, I'd say, the SPS, which is right at the XPU. Our data center revenue is very, I would say, very equal across all of them. So the growth that we are seeing in the AI data center is not necessarily anchored on the high voltage. We are gaining share and ramping close to the core as well. But all of it is growing. And those are, by the way, those are all consistent with what we've said as far as wins that we've talked about over the last couple of quarters are now starting to ramp and contribute revenue. Silicon carbide is specifically that now silicon carbide, obviously, we've made the investment thesis on automotive. That's still winning in China, both in AI data center and automotive specifically. And my commentary is more on we're seeing that growth now in North America, in PSUs and so on, where high voltage comes in. But it is not only a silicon carbide story for us in AI data center. It's really across the board.

Got it.

Thank you.

Thank you. Our next question comes from Christopher Rowland with Susquehanna. You may proceed.

Thank you, guys. Yeah, in regards to the AI opportunity, and I know you've hit a lot of this, but it was a considerable increase in the slide deck for the AIDC TAM. I think you went from $12 billion to almost $50 billion in that number. You also talked about an expanded role in NVIDIA MGX, as well as a hyperscale opportunity, I believe, for battery backup at AWS. I guess, first of all, can you talk about that increase in the TAM and what, from a product basis, is expanding that almost fourfold?

Yep. Yeah, a couple of things. So if you look at the number, the number we're anchoring on is 2030. And the projection we are basing the increase is really correlated to a, I'm going to call it a gigawatt scale that would be installed by 2030. And if you take the install base of power and compute that is really projected in 2030, and you backtrack and convert that to really installation of power that we need at a data center side or a rack side, and we use our content per rack, that's where the increase happens. So that's point number one, is just the volume that is proportional to the gigawatt increase that we've seen. This is purely, call it market data. We do see the correlation with market data, and we're using that data to backfill into our content. Point number two, because my second point is more on across the board, not just on AI data center, RTAM has increased, and that is really a factor of we have targeted, we have invested, and we have been introducing products that we did not have last time we updated this a few years ago in our analyst day. And as we turn those investments into opportunities and those markets now start coming into the investments that we've made into the last couple of years, we're starting to see that increase. Of course, it's high in the AI data center given the content growth that I talk about, you know, 10x on the high voltage, for example, but also our TAM is increasing across the board. You can think about vertical gap. You can think about additional opportunities with Treo. You can think about, you know, some of our silicon carbide JFET that is both finding its way in a data center, but also the industrial halo, you know, solid state circuit breakers, solid state power disconnect, and, and, and. All of these are opportunities that did not exist even a few years ago. And when you add all of them up, that is the opportunity in front of us, and that is the investment we have already made in products that we have been delivering, and that's the next five years for us. So stay tuned, and we'll love to see you at Analyst Day.

I will certainly be there, Hassan. The other big change here, I think, was the EVTAM that went from like $26 billion to $63 billion. Very interested as to what's driving that. Obviously, the silicon carbide opportunity. I think maybe there was a zonal architecture commentary as well. But what else is almost doubling that EV TAM for you guys?

So you can take a look at it where before, you know, as you get more and more penetration of the EV and more of the acceleration of the EV. Remember, we've talked about two things in electrification. One is EVs as a higher percent of SAR, and number two is the acceleration, given the, I guess, the financial side of silicon carbide and the advancements we've made there, that silicon carbide, which is the opportunity for us, is a higher percent of penetration within the EVs from your standard silicon. And the other one, which we've talked about here, about some designs that we have won both in China and North America on the hybrid, where we've always thought hybrid will remain as a silicon or IGBT. And given our competitive nature and what we've introduced and the extended range of hybrids that OEMs are looking for, that's content that we have, again, within the same area that we have products for already. So that's part of our increased TAM. And you mentioned it in addition to a lot of the trail opportunities that we've had with 10Base T1S, ultrasonic sensing, NNN, plus a lot of the onboard charging, one of which I highlighted here, which are all coming into our technology domain. So all of these, again, we took a very fresh view of where the market is and is headed, given the trends and the technologies we have. And you can think about it as a bottoms-up TAM adjustment that we've done as part of our work for Analyst Day and our strategic work we have been performing to refine and deploy our strategy.

Thanks so much, Hassan.

Thank you. Our next question comes from Blaine Curtis with Jeffries. You may proceed. Hey, good afternoon, guys.

I just want to go back, I think, prior question. The growth in other of $100 million, I just want to make sure that was the correct statement that data center was the primary driver there. Before you were giving out percent of revenue, I don't know if you could just dial this in a little bit better. I want to make sure that that is the source of the growth.

The AI data center was the primary driver, but the other markets were also up, so it wasn't 100% AI data center. But that was, as a percentage, was the highest growth in that bucket. Gotcha.

And then, Seth, I wanted to ask you, you mentioned lead times were extending. I was wondering if you could kind of give us a context of what that means. And then, you know, I guess you're talking about prioritization. I'm kind of just curious on utilization, keeping it flat. Is it just a mixed issue that you couldn't improve those deliverables? Or I'm just trying to understand, walk us through the flat utilization.

Yeah, let me start with the lead time. So lead time stretched out from about 27 weeks to somewhere around 32 weeks on average. That's across the entire portfolio. We have some that are shorter, some that are longer, obviously. but we did see lead time stretching out. As Asan said, we're seeing a lot of orders inside of lead time, a lot of escalations, kind of points to, I guess, kind of a healthy environment, demand environment, which kind of gives us that indication of the future. And I mentioned the book, The Bill Continues to Improve. So we're getting better visibility even into 27, and we've got, in some situations, some customers ordering out into 28, trying to lock up supply. In terms of the utilization, look, we've, you know, we've had to increase utilization very sharply to reflect the increase in demand that we've seen sharp, right? So if you think about a cycle time, a fab cycle time, or, you know, all the way through from beginning a wafer to a finished good, you know, it can be four to six months. And so you've kind of got to get that, you've got to ramp it, and then you can catch up with demand. So that's where we expect that happening. Now, if the demand continues to increase beyond what we're seeing, we'll continue to take that utilization up. But right now, we believe we can catch up, and that's why utilization doesn't have to go up, at least, you know, in the next quarter. Thanks, Matt.

Thank you. Our next question comes from Tom O'Malley with Barclays. You may proceed.

Hey, guys. Thanks for taking my question. I just wanted to complete the deep dive on gross margins. I know you've gotten a bunch here, but the last remaining component there is depreciation. If you look at depreciation in the quarter, I think it was at a low for, you know, over the past two years plus. I just want to make sure nothing changed there. And then as you look forward, obviously, you're going to see this utilization step up. But anything unexpected from a depreciation side or anything expected that we can look at September, December? I know that, like, you kind of trended in this mid-600 range. Anything changing there? Just because I know you are doing a lot of these exits, that should naturally come down, I would imagine. Anything to help there?

Yeah, no. Yeah, Tom. So, you know, we did that – we took capacity offline, you know, about 12%, right? And so that's starting to hit the depreciation as that capacity is coming offline. I would say the depreciation that you're seeing now is really kind of steady state at this point, right? And if you look at our CapEx, you know, it's maintenance CapEx. I said that's going to be below our 5% target for this year. I think our target over multiple years is kind of in that mid-single-digit percentage range. But, you know, we're keeping it tight this year. and it's primarily maintenance. So no, no change to depreciation from kind of what you're seeing as steady state right now.

And then just one, if I could sneak it in on the DISTI side, I saw it stepped up a little bit. Traditionally, you see DISTI kind of aligned with China, so I saw that step up as well. Is that the right way to think about it? Is that more auto or industrial related? Any color on that step up in DISTI would be helpful. Thank you, guys.

So the mass market actually increased 20% quarter-over-quarter. So you can think about a lot of that mass market tends to be industrial. There is some automotive in there. But I wouldn't call it anything other than the mass market, and that's a good leading indicator, right? So we've been investing and putting inventory into the channel to satisfy that mass market. We're now seeing that happen with a 20% sequential growth in that revenue.

Thank you. Our next question comes from Tories VanWerk with Stiefel. You may proceed.

Yes, thank you. I just had a follow-up on some of these capacity slash utilization questions. So, you know, obviously it's copyright strategy makes a lot of sense, but, you know, it sounds like you do have some delinquencies. So I'm just curious, like, why wouldn't you ramp the capacity utilization faster? And if you do get, you know, continued upside orders here, how much flexibility do you have with your external partners to keep ramping capacity?

You cut out for like a few seconds in the middle, but I think I caught into how would we reconcile divestitures with increasing demand that I capture?

No, I was asking how much flexibility do you have with your external partners to ramp more capacity?

Yeah, so external, obviously, everything is constrained, whether it's internal or external. When it comes to short lead time, we believe we have good capacity and good allocation coming from the outside. The issue is not really capacity of what we can support as far as, you know, max capacity or max revenue. It is how quickly the demand came in. You know, we can service a lot of demand from Dibank, but at some point, like Sat said, when we start a wafer today for an order that we got within the quarter that we didn't anticipate, you have a short-term allocation we have to deal with. That's both internal and external, even if you have the capacity secured, is how quickly you are able to get to the capacity. So we feel comfortable about external supply. We're not fighting for a lot of the advanced nodes like on the compute side. Our capacity is well understood. A lot of our capacity is also internal. We still do over 60% on internal manufacturing at OnSemi, even with the divestitures. So all of these put together put us in good place, and that's what Seth said. It's a short-term where we're going to catch up. If demand continues to accelerate, we'll take utilization up. We're not capped out. It's just how quickly we get there. And in the short term, we just have to make these calls of prioritization until manufacturing output catches up.

Yeah, not all capacity is fungible, right? so we do have some supply constraints on certain lanes that's where we've just got to catch up with that with that demand and then we believe we can service it yeah that makes sense and that's my follow-up and it's fun you talk about the power from from grid to core you talk about the content per act you know 15,000 go and eventually the hundred fifteen thousand like what you know how should we think about that journey and you know will it be a gradual journey or is there like a step function maybe by you know I guess is when 800 volt and maybe by 2028 when that market really starts to take off. But yeah, any more color you could add there would be really helpful.

Yeah, the content, look, a rack that is a 800 volt DC rack with the backplane at 800 volt is a step function from a prior rack. You're not going to see that as far as revenue step function because remember, you have a buildout that's going to happen. So as these racks start to get deployed into newer data centers and whether, you know, older data centers will come in and how quickly they will retrofit and so on. So we model that into a gradual, but a very, very healthy growth trajectory or slope, if you will. But it's not going to be, you know, just a step function, but it is going to be a very aggressive longer term growth that we see. And what you said is right? You know, you can think about it as starting, you know, whatever people believe there's kind of a range that I give end of 27, beginning of 28, you know, give or take a quarter. But that's kind of where it's going to start ramping and then mature somewhere depending on the build out of the data center. So that's how we are looking at it from the time. But we're already starting to see some platform. That's where the design is. So it kind of starting to look like the content is justified, the way we model it, and our content in those. You know, you heard me talk about VerticalGAN, JFET, and so on. So, you're starting to see a lot of that content really solve density and efficiency problems in these new architectures.

Very helpful. Thank you.

Thank you. Our next question comes from Jim Schneider with Goldman Sachs. You may proceed.

Good afternoon. Thanks for taking my question. You know, in light of all the metrics you cited around lead times, extending, and everything else in terms of expedites, and normally at this point in time, I would have thought you would see OEM customers' inventories start to expand or customers taking a little bit more risk on their own balance sheets. Is that something you're seeing yet at this point in the cycle or not quite yet in terms of absolute dollars or in terms of days?

No, I mean, obviously, I can't speak for our customers because, you know, that's unless they publicly talk about it. But we're not seeing, from our perspective, we're not seeing an inventory build. We are seeing really consumption to demand. And that's why you see it in specifically, of course, in auto and industrial. We do believe we are shipping to end demand. And, you know, there are technologies where you would see that is where it's constrained. And we're making a lot of the hard decisions, which is, by the way, the same thing we've done back in COVID, where we decided this quarter to take inventory or days of inventory down in the channel so we have very close control of potential inventory bills. So we're very disciplined about this. We're excited about the signals in the market that I quoted. We're excited about the opportunity in AI Data Center, but we are maintaining a very disciplined and process-based, KPI-based approach to our manufacturing and our deployment of resources, so we don't get ahead of it. Thank you. And you see that, by the way, you see that in our inventory position and the drain and so on across the board. All matrices show a disciplined approach, even in a backdrop of a strong market or stronger market.

That makes sense. And then just in terms of the input cost increases you talked about, you mentioned increasing price to offset those input costs over the coming quarters. You know, as you look into, for example, 2027, what are your suppliers telling you about further potential input cost increases? And maybe if you could handicap your level of confidence in staying ahead of those in terms of pricing or potentially significantly ahead of those.

Yeah, so obviously, we have a very broad range. You know, we have some suppliers where we have long-term views and we give long-term visibility. and we have long-term visibility for potential increases that is coming. What I would say the only consistent message I can say here is it's not going down. And given the fact that it's not going down, we are anticipating to make sure our business also reflects that, whether from now, because a lot of them will be effective in Q4, or telegraphing that in 27 we're not going to have any reductions or annual reductions and so on. So it's not a one-size-fits-all, I would say, but we have visibility on where we're landing for 27, and we'll get more and more clarity as we get closer to that. But we have started these discussions, and I can tell you nothing is coming down, and therefore I'm not expecting a softer pricing environment in 27 either. Thank you.

Thank you. Our next question comes from Joe Moore. with Morgan Stanley, you may proceed.

Great. Thank you. Utilization in the low 80s, you know, how do you think that compares to some of your direct competitors? And if we sort of continue to get into a more supply-constrained environment, do you anticipate that you'd be able to take share given where you're sitting with capacity?

Yeah, Joe, look, I don't want to comment about our competitors. It can tell you what we're doing in our business, right? Again, we've taken this utilization up quick in response to the snapback and demand. You know, for us, getting to kind of in that low 90%, 92%, 93% is fully utilized. Once we get there, we start flexing to the outside. So there's a certain amount of our products today that we're manufacturing inside that we can take to the outside. So I don't think we're going to be limited. You know, for us to really start to get to a point where we even think about getting kept out, Revenue is still 25%, 30% higher than the run rate today. So we're not worried about that given our flexibility with our fab right and our ability to flex inside and outside.

And look, the focus for our growth and our new product introduction, think about Trail, for example. That investment in capacity is done. It's in East Fishkill. East Fishkill is not fully utilized, so we have the runway to ramp. So it's not like I said earlier, not everything is fungible, But the areas where we have growth and the areas we've invested in, those areas where we have runway and we will continue to ramp aggressively across all markets.

That's helpful. Thank you. And then in terms of things getting tighter and starting to see constraints, are there any specific areas that are more impacted than others? Any hotspots? Is silicon carbide, you know, different than everything else?

Just any sense of, you know, where supply demand might be different? no i think i think if you think about it across power and it's not just high voltage uh because a lot of the for example data center is consuming power not just in the high voltage you know i mentioned earlier we're ramping everything from the the wall all the way to the xpu and that is high voltage all the way to low voltage and we see constraints in some of those lanes. We have one of the most efficient power products out there. So we're getting an outsize and we're running it in multiple fabs now. So we're increasing our capacity and our flexibility to be able to service it. But that we are, you know, those lead times have extended and we are working with customers on supporting it. We will win share where others cannot, but that's not how we're winning. We're winning because really the product is superior. Because if it's a multi-source product, you can imagine the margin is not as exciting, and that's not the business we play in. That's the business we actually exited. So we are winning where our products provide a differentiation to our end customers, and that's what's consistent. You see that in silicon carbide. I called out China specifically, given that I keep talking about we always win across the board based on efficiencies and product you see that in china you see in north america and you've seen it in europe so that's our focus that's our investment and that's how the margin expansion will continue thank you thank you our next question comes from vj rakesh with muzuho you may proceed yeah hi just a quick question on the ai data center side I saw that 48 billion times, big increase in that opportunity there.

Is there a way to look at it, how your content breaks out between site power, the power in the rack, and the compute rack as you broke out? What's the split of the opportunity you said within that?

Yeah, I'm going to give you an approximate. And the approximate is if you look at the numbers we've given as far as content per rack, And you think about high voltage, which I would put to a first order in the side card, going to 50% of the total, $115,000 of content, 50% of it is high voltage, 50% is medium and low voltage. That gives you that split 50-50. Today, on the $15,000 of content, that split between high voltage and then the rest is 70-30. 30 is the high voltage, 70 is medium to low. So the increase from a dollar content is on the high voltage side, but both are going up. One is going up 10, one is going up like 5 to 6x. So both increasing, but an outsized increase is, of course, in the high voltage given the market trend we are talking about.

Got it. And then when you look at your auto industrial and data center, is there a way to look at how the order trends are by the different geographies? Like what are you seeing in U.S. versus Europe versus China, I guess?

Yeah, I think if I take it in order, automotive specifically. All three. All three, okay. It's like very, very different. All three. So I would say automotive, I'll just rank order them. In auto, it's China, U.S., Europe. Industrial, I would say China, U.S., Europe. And AI Data Center is really U.S. And some China that I talked about with Gray Wall on this call is starting for us as well, but primarily in the U.S. In Europe, you have, of course, the AI halo that I call out within our industrial business, not on our AI data center, but it is an AI halo that's supporting it. I think that's kind of how you can think about it. Got it.

Thanks a lot. Appreciate it.

Thank you. I would now like to turn the call back over to Hassan El Khoury, President and CEO, for closing remarks.

Thank you all for joining us today. Before we close, I'd like to recognize our employees around the world for their dedication, innovation, and execution. The momentum we are seeing across our business, the opportunities ahead of us, and our confidence in the future are all made possible by their hard work and commitment. On behalf of the leadership team, thank you for everything you do to serve our customers and move on semi-forward.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.