ON Semiconductor (ON) Q2 2026 earnings call transcript

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 An-Sami's second quarter results conference call. I am joined today by Hassan El Khoury, our President and CEO, and Thad 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 risk 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 Qs, and other filings with the Securities and Exchange Commission and in our earnings release for the second quarter. Our estimate 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, Parag. 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 growth. 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 secured 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 continued 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 evolved 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 US 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 result 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 26 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 million an increase of 13 quarter and 19 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-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 FabRite initiatives.

Gap operating expenses were $358 million, including $41 million in restructuring expenses, and non-gap operating expenses were $297 million. Gap operating margin for the quarter was 16.1%, and non-gap operating margin was 20.8%. Our GAAP tax rate was 16% and non-GAAP tax rate was 15%. GAAP earnings per share was $0.56. Non-GAAP earnings per share was $0.74, a 16% increase over the prior quarter.

GAAP share count was 404 million shares and non-GAAP 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 flow 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 C3 revenue will be in the range of $1.65 billion to $1.75 billion. dollars. Our non-GAAP gross margin is expected to be between 40 and 42 percent, 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. 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.

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. And, of course, regionally, automotive behaves 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, 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 it, 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 material in nature, material meaning 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.

Yeah, Vivek, for the Q2 gross margin, you actually need to go back and look at the Q4 utilization because you 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.

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.

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 that doesn't, 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, you know, 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.

Yeah, I mean, obviously, when we have some technology specifically in power where we have constraint. 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 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.

Yeah, as you look forward, you know, 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.

I'll let you run the numbers, but 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 and we'll continue to deliver in that market.

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 and 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.

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 TEM 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. 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.

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 financial side of silicon carbide and the investments 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 10-base T1S, ultrasonic sensing, and an end, 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 that's a, 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.

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.

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. You know, as Hassan said, we're seeing a lot of orders inside of lead time, a lot of escalations, you know, kind of points to, I guess, kind of a healthy environment, demand environment, which kind of gives us that indication of the future. And, you know, I mentioned the book, The Bill Continues to Improve. So we're getting better visibility, you know, 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.

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. And so 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.

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 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.

Sorry, 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 kept her?

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 Fat said, when we start away for 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 that's at. 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 demand, and then we believe we can service it.

Yeah. Yeah, the content. And look, a rack that is a 800-volt DC rack with the backplane at 800 volts 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 build-out that's going to happen. So as these racks start to get deployed into newer data centers and whether 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.

No, I mean, obviously I can't speak for our customers unless they publicly talk about it. But from our perspective, we're not seeing an inventory build. We are seeing really consumption to demand, and that's why you see it specifically, of course, in auto and industrial. We do believe we are shipping to end demand. And 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, you know, 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.

And 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.

So obviously, we have a very broad range. 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 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.

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, you know, 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 we have runway and we will continue to ramp aggressively across all markets.

No, I think if you think about it across power, and it's not just high voltage, because a lot of the, for example, data center is consuming power, not just in the high voltage. I mentioned earlier we're ramping everything from 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 it 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.

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 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.

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.

Yep.

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.