onsemi's AI Data Center Revenue to Double in 2026 as Cycle Inflects, Margin Expansion Path Becomes Clearer
Q1 2026 Earnings Call, May 4, 2026
onsemi delivered a first quarter that beat expectations on nearly every dimension, but the more consequential signal for investors was forward-looking: AI data center revenue grew more than 30% sequentially in Q1, roughly double the growth rate management had expected entering the quarter, and the company now guides for that segment to double year-over-year in full 2026. Combined with a third consecutive quarter of gross margin expansion, improving lead times, and a hardening view that the cycle has found its trough, the call offered more structural conviction than onsemi has been able to provide for several quarters.
AI Data Center: Faster Than Expected and Broader Than One Customer
The single most important new data point from the call is the magnitude and breadth of AI data center momentum. Management had entered Q1 modeling high-teens sequential growth in the segment. The actual outcome was 30%-plus. CEO Hassane El-Khoury was explicit that this outperformance was not driven by a single XPU vendor or a single hyperscaler, but rather by "broader adoption across the power tree with multiple XPU vendors and all the leading hyperscalers." onsemi now frames its competitive positioning around being "the only broad-based U.S. power semiconductor supplier" with coverage from the grid to the processor, a claim that encompasses high-voltage conversion, intelligent power stages, and system-level integration.
The company's partnership with Flex Power is illustrative of that breadth, spanning more than 30 active programs across intermediate bus converters, power supplies, battery backup, supercapacitors, and next-generation 800-volt DC architectures. On content economics, El-Khoury provided a striking comparison: a 120-kilowatt rack at standard voltage carries approximately $9,500 of onsemi content, while an 800-volt or high-voltage rack carries roughly $115,000, nearly a 10x increase. As hyperscalers push toward higher-voltage distribution architectures, the content opportunity expands well beyond the rack itself, including solid-state transformers for grid-level infrastructure, which El-Khoury flagged as an incremental forward-looking opportunity.
Regarding the two 2025 acquisitions that feed directly into this segment, El-Khoury confirmed that Vcore multiphase controller and regulator products from the Aura acquisition are tracking to plan with strong customer interest across CPU and GPU applications. Vertical GaN from the NexGen acquisition is sampling, with revenue on track to begin in 2027. The overall GaN design funnel now exceeds $1.5 billion, with ten products already sampling and another twenty set to sample in the second half of 2026.
Gross Margin: The Path to 50%-Plus Is Now Quantified
CFO Thad Trent offered the most granular public decomposition of the gross margin expansion roadmap the company has provided. From the current 38.5%, he outlined three distinct levers, each worth roughly 200 basis points in the longer term. First, utilization: at 77% in Q1 and with every utilization point worth 25 to 30 basis points, there is meaningful runway before the company approaches its effective ceiling in the low 90s. Trent noted that reaching full utilization requires revenue roughly 25% to 30% above current levels, after which the company would flex to external foundries. Second, the ongoing Fab Right manufacturing optimization initiative, which is already contributing but has another 200 basis points still to deliver. Third, product mix, where the ramp of higher-margin products like Treo, which carries 60% to 70% gross margins, is expected to contribute another 200-plus basis points over time. Trent also noted that the fab divestitures from 2022 will begin showing meaningful P&L impact in 2026, with the larger effect in 2027 and beyond, adding yet another layer. "When you start to stack it up, you can get over 50% when you do the math," he said, adding that the second half of 2026 should see "larger step functions" than the incremental improvement visible in Q1.
A near-term tailwind that has not yet hit the P&L is pricing. Input cost inflation is already showing up in costs, but the pricing actions taken to offset them have not yet flowed through. Trent indicated that effect becomes visible in the second half of 2026, providing an additional margin support mechanism that is not yet in consensus models.
Automotive: First Year-Over-Year Growth in Seven Quarters, Content Outpacing SAAR
Automotive revenue of $797 million in Q1 was roughly flat sequentially but grew nearly 5% year-over-year, marking the first positive year-over-year comparison in seven quarters. Management's characterization is that the business is now "shipping to natural demand," meaning channel inventory has normalized but a genuine replenishment cycle has not yet begun. That dynamic, if it materializes later in 2026, represents upside that is not currently embedded in guidance. Q2 automotive is guided flat.
China is the clear outperformer. Despite a 6% decline in Chinese passenger vehicle volumes in Q1, onsemi's China automotive revenue grew year-over-year, a direct demonstration of content share gains rather than SAAR leverage. At the 2026 Beijing Auto Show in April, onsemi's silicon carbide accounted for approximately 55% of new EV models deployed, a figure that underscores the company's entrenched position in next-generation 900-volt architectures. Expanded collaborations with Geely and NIO were highlighted as supporting those platforms as those customers scale globally.
On zonal architecture, onsemi began production shipments in Q1 of its Treo-based 10BASE-T1S Ethernet solutions to a leading North American OEM's next-generation platform, integrating more than 30 Treo devices per vehicle. El-Khoury made the content argument directly: "That is a net new content that did not exist about a year ago because zonal is new, 10BASE-T1S or Ethernet-based is new. That is content we are adding to an existing SAAR as vehicles upgrade to a software-defined vehicle."
On the supply side, El-Khoury noted that certain technologies are already on allocation, that lead times have extended from roughly 23 weeks in Q4 to 26 weeks in Q1, and that he is "starting to get calls" from OEMs anxious about availability. Some North American OEMs are transitioning to direct semiconductor sourcing, bypassing Tier 1s, which onsemi views as a structural positive for direct engagement and pricing. The replenishment cycle, when it arrives, would coincide with already-tight supply in shared technologies between automotive and AI data center, a dynamic that could drive more aggressive pricing outcomes than the market currently anticipates.
Industrial and Energy Storage: A 40% Growth Forecast That the Market May Be Underweighting
Industrial revenue of $417 million was down 6% sequentially but came in ahead of expectations, with broad-based strength in traditional industrial markets for the second consecutive quarter. For Q2, management guides industrial up mid-single digits sequentially. The more notable disclosure, however, was on the energy storage subsegment. Driven by differentiated silicon carbide hybrid modules, onsemi now expects more than 40% year-over-year revenue growth in its string ESS and microgrid business in 2026, with market share approaching 60%. A large U.S. OEM microgrid deployment is already ramping. The company's announcement with Sineng Electric for utility-scale solar inverters and liquid-cooled energy storage platforms reflects the same dynamic. El-Khoury framed this as the "AI halo effect" extending into adjacent infrastructure markets, accelerated by rising energy costs and declining battery prices improving project economics.
Treo: From Proliferation to Revenue, With Margin Implications
Treo revenue grew more than 2.5 times sequentially in Q1, moving the platform from design-win accumulation into actual revenue ramp. Management reiterated the $1 billion revenue target for 2030 but emphasized that the more important near-term signal is margin structure: at 60% to 70% gross margins, Treo is a qualitatively different business from onsemi's historical mix. Design wins now span zonal automotive architecture, AI data center power management, ADAS applications, and humanoid robotics inductive position sensing. The platform is also being pushed into the mass market through distribution, adding a volume dimension to what is already a high-margin revenue stream. Mass market revenue through distribution grew approximately 35% year-over-year in Q1, accelerating from the 30% pace cited a few quarters ago.
Capital Allocation and Balance Sheet
onsemi repurchased $346 million of shares in Q1 at an average price of $60.54, representing approximately 160% of free cash flow generated in the quarter. With the stock having recovered materially from those levels, Trent signaled that the opportunistic posture would moderate, reiterating that 100% of free cash flow returned to shareholders over time is the baseline framework, with flexing upward when management perceives valuation dislocations. Free cash flow was $217 million on $239 million of operating cash flow, with capital expenditures of just $22 million, or 1.4% of revenue. Trent guided mid-single-digit CapEx intensity as the ongoing target, noting that the capacity investments required to support new product ramps, including Treo at East Fishkill, have already been made. The company carries approximately $2.4 billion in cash with total liquidity of $3.9 billion.
Inventory increased to 201 days from 192 days in Q4, with 75 days classified as strategic inventory, down from 76 days, and the remaining 126 days as base inventory. Management expects to deplete strategic inventory over the next two years. Distribution inventory was flat at 10.8 weeks, within the company's stated 9-to-11-week target range. Non-core revenue exits remain on track at roughly $50 million in Q1 and $30 to $40 million planned in Q2, with the full exit program expected to conclude by end of 2026. Post-exit, the growth algorithm reverts to market growth rate without the 5-percentage-point drag.
Second Half Outlook: Better Than Last Year, With Real Visibility
El-Khoury was unambiguous that second-half 2026 will outgrow the first half, and explicitly contrasted this with his personal sentiment heading into the second half of 2025. "We see a much better outlook than we did last year," he said, pointing to book-to-bill trends, order patterns, lead time extensions, and concrete program ramps already underway in AI data center, China EV, and energy storage as the foundation for that confidence. The combination of a recovering cycle, a structural shift in revenue mix toward higher-margin applications, and a cost structure that has been compressed over three years of restructuring creates a setup where operating leverage could prove more pronounced than current Street models reflect, particularly if the automotive replenishment cycle arrives in the second half as management expects it might.
onsemi Deep Dive
The Business Model and Strategic Evolution
ON Semiconductor Corporation, operating under the onsemi brand, functions as a highly specialized architect of power and sensing technologies. The company has methodically transitioned away from its historical roots as a broad-based, high-volume supplier of low-margin commodity analog components. Today, onsemi generates its revenue through the design and manufacturing of intelligent power and intelligent sensing solutions, structurally organized into three main segments: the Power Solutions Group, the Analog and Mixed-Signal Group, and the Intelligent Sensing Group. The core economic engine relies on securing long-term supply agreements and designing proprietary silicon carbide and advanced silicon components into the mission-critical power architectures of electric vehicles, industrial automation platforms, and artificial intelligence data centers. By concentrating on these high-growth end markets, the company captures higher average selling prices and insulates its product portfolio from the cyclical volatility historically associated with consumer electronics.
Customers, Competitors, and Supply Chain Dynamics
The company maintains deep, multi-year integration with premium automotive original equipment manufacturers, counting Tesla, Volkswagen, BMW, NIO, and Geely among its highest-profile end customers. Beyond automotive, onsemi supplies critical power conversion components to tier-one industrial integrators like Enphase for energy storage systems, as well as leading hyperscale data center operators actively building out specialized artificial intelligence infrastructure. In the high-voltage power electronics domain, onsemi competes directly against entrenched European incumbents Infineon Technologies and STMicroelectronics. Infineon holds the dominant position in broad power semiconductors, while STMicroelectronics enjoys a first-mover advantage in the automotive silicon carbide sector through its early supply agreements with Tesla. Wolfspeed serves as a formidable specialized rival in silicon carbide substrate manufacturing, though it struggles with the complexities of downstream module integration and manufacturing yields. In the analog and sensing markets, onsemi frequently contests market share with legacy giants Texas Instruments and Analog Devices. Unlike fabless peers, onsemi operates a hybrid manufacturing network. Through strategic acquisitions, the company fundamentally altered its supply chain dependency by vertically integrating its silicon carbide production from raw crystal boule growth to finished module packaging, effectively mitigating external substrate supply bottlenecks.
Market Share and Competitive Positioning
Quantitative analysis of end-market penetration reveals onsemi as a top-three global player in the advanced power sector. The company holds an estimated 25 percent market share in the automotive silicon carbide power module space. Its competitive positioning is particularly pronounced in the Chinese electric vehicle market, where onsemi secured an estimated 55 percent silicon carbide penetration rate across new electric vehicle models deployed at the April 2026 Beijing Auto Show, defying localized macroeconomic headwinds. Within the Intelligent Sensing Group, the company commands a dominant position, holding greater than 60 percent of the market share for advanced driver assistance systems image sensors. Furthermore, aggressive deployment of hybrid power modules has allowed the company to rapidly capture territory in the energy storage system and microgrid sector, where management projects its market share to approach 60 percent globally by the end of 2026.
Competitive Advantages
The foremost structural advantage onsemi possesses is its stringent vertical integration within the silicon carbide manufacturing process. Controlling the production lifecycle from crystal sublimation to final defect testing protects the company from external supply shocks and structural margin compression. This integration is amplified by the ongoing transition from 150-millimeter to 200-millimeter silicon carbide wafers, predominantly executing at the Bucheon, South Korea facility. Operating on 200-millimeter wafers yields approximately 80 percent more chips per wafer, delivering a massive unit cost advantage over competitors still relying on older substrate standards. This manufacturing edge will be further entrenched by a $2 billion investment into a fully vertically integrated silicon carbide plant in the Czech Republic. Additionally, the company operates under a highly disciplined operational model. This framework strips out the fixed overhead typically associated with legacy semiconductor fabs, intentionally exiting hundreds of millions in low-margin, non-core business lines to create a structurally elevated gross margin floor.
Industry Dynamics: Opportunities and Threats
The macroeconomic environment presents a bifurcated landscape of structural megatrends and severe localized cyclicality. The accelerating transition from 400-volt to 800-volt and 900-volt electric vehicle architectures represents a massive tailwind. Higher voltage architectures functionally require silicon carbide over traditional silicon to manage thermal dissipation and switching speeds, inherently increasing the dollar content onsemi captures per vehicle. Concurrently, the explosive build-out of artificial intelligence data centers demands unprecedented power density, specifically 800-volt high-voltage direct current systems, pulling high-margin power components into server racks. Conversely, the company faces acute threats stemming from an uneven global electric vehicle adoption curve and intense geopolitical trade frictions. Over 30 percent of onsemi revenues are exposed to the Chinese market. As domestic Chinese foundries rapidly expand their mature node and raw silicon carbide substrate capacities, the risk of localized oversupply and aggressive pricing wars is highly elevated. Furthermore, as automakers face compressed margins from volatile commodity prices, they routinely pressure tier-one component suppliers to absorb price reductions, threatening forward margin expansion.
Next-Generation Technologies and Revenue Drivers
To sustain top-line acceleration, onsemi is commercializing several pivotal technological advancements. The rollout of its EliteSiC M3e MOSFETs reduces conduction losses by 30 percent, establishing a new performance benchmark for electric vehicle traction inverters. Additionally, the proprietary Treo multi-market analog and mixed-signal platform has demonstrated rapid adoption, doubling its sampling rate and generating a design funnel exceeding $1 billion. Artificial intelligence power delivery is rapidly emerging as a central revenue engine; the company generated over $250 million in artificial intelligence data center revenue in 2025 and explicitly expects that figure to double in 2026. Recognizing the shifting physics of power electronics, onsemi is actively aggressively entering the gallium nitride market. Backed by a strategic manufacturing collaboration with GlobalFoundries, the company plans to sample over 30 discrete gallium nitride devices spanning 40 to 1,200 volts throughout 2026, targeting the lucrative mid-voltage industrial and data center power supply markets.
The Threat of Disruptive Entrants
The most credible disruptive threat to onsemi originates from the accelerated commercialization of gallium nitride technologies by aggressive new entrants. Gallium nitride offers inherently superior switching frequencies and smaller physical footprints compared to traditional silicon and lower-voltage silicon carbide components. Pure-play innovators like Navitas Semiconductor and Efficient Power Conversion have established robust technological moats in the low-to-mid voltage consumer and data center markets, effectively displacing legacy silicon architectures. More concerning for the global competitive balance is Innoscience, a vertically integrated Chinese manufacturer that has rapidly captured an estimated 30 percent global market share in power gallium nitride. While these disruptors currently operate predominantly in voltage ranges below onsemi core automotive traction inverter market, their steady upward migration into 650-volt and 1,200-volt applications poses a legitimate substitution risk over a five-year horizon. Simultaneously, domestic Chinese silicon carbide substrate producers like SICC and TanKeBlue are scaling production at an aggressive pace, threatening to commoditize the lower end of the wide-bandgap market.
Management Track Record
Chief Executive Officer Hassane El-Khoury has engineered one of the most rigorous operational turnarounds in the semiconductor sector. Management execution is defined by an absolute refusal to chase unprofitable volume. By actively pruning the product portfolio and exiting planned non-core revenue streams, including an estimated $300 million targeted for exit in 2026, leadership has successfully decoupled profitability from broader cyclical downturns. This discipline allowed the company to navigate the severe 2024 to 2025 industrial and automotive inventory digestion phase while maintaining non-GAAP gross margins above 38.4 percent, a stark contrast to historical trough margins in the low 30s. Cash generation and capital allocation under the current executive team have been pristine. The company generated a record $1.4 billion in free cash flow in 2025, representing a 24 percent free cash flow margin, and returned 100 percent of it to shareholders through share repurchases. This disciplined approach to capital efficiency is further reinforced by a newly authorized $6 billion share repurchase program.
The Scorecard
onsemi has successfully transformed from a decentralized supplier of commoditized analog chips into a highly disciplined, vertically integrated powerhouse in wide-bandgap semiconductors and intelligent sensing. By taking complete control of the silicon carbide manufacturing process and aggressively transitioning to 200-millimeter wafer architectures, the company has insulated itself against supply chain fragility while establishing a structural cost advantage over pure-play competitors. Strategic positioning within 800-volt electric vehicle architectures, energy storage systems, and the increasingly power-hungry artificial intelligence data center market provides a highly visible runway for sustained revenue expansion, even as legacy automotive volumes experience near-term deceleration.
The durability of this margin profile relies on management strict adherence to capacity discipline amid an influx of subsidized Chinese manufacturing supply. While the ascent of gallium nitride specialists presents a tangible long-term substitution threat in the mid-voltage sector, onsemi internal pivot toward comprehensive power tree solutions demonstrates necessary strategic agility. Ultimately, the combination of dominant market share in automotive imaging, a protective moat in silicon carbide module integration, and an exceptionally clinical approach to capital allocation underscores a robust institutional quality asset operating at the absolute center of global electrification.