ON Semiconductor Corporation (ON) | The Buildout — AI Infrastructure

The Verdict

ON Semiconductor makes power semiconductors — the devices that convert, regulate, and protect electricity — plus the analog and sensing chips around them. In the AI buildout, that places the company in the power tree, the chain of components that takes electricity from the grid down to the voltages AI processors and racks need. Its traditional base is automotive and industrial, where it sells power and sensing content into electric vehicles, energy storage, and factory equipment. AI data center is the fastest-growing part of the business and now central to the growth story, but it is not yet the revenue base. ON manufactures most of its own chips internally, a choice that supports margins when factories are full and pressures them when they are not.

Earnings Beat

In Q2 2026, ON reported revenue of $1.6 billion, up 9% year-over-year and 6% sequentially, above the midpoint of guidance and including the final $35 million of planned non-core revenue exits. Non-GAAP gross margin was 39.3%, up 80 basis points sequentially, and non-GAAP EPS was $0.74. Free cash flow was $425 million, up from $106 million a year earlier.

Management tone: Management's cycle framing shifted across three calls — from "clear signs of improvement" to "a clear inflection point" to, on the Q2 2026 call, entering the second half of the year "from a position of strength." They raised the AI data center outlook twice, from qualitative to "double" to "more than double," and gave a specific gross-margin framework: 25–30 basis points of gross margin per point of utilization, with about a two-quarter lag to the P&L. Supply language hardened as lead times stretched to about 32 weeks on average. On the harder questions, management was direct about allocation, pricing, and input costs, and declined to give a discrete AI data center revenue figure beyond "more than doubling."

Management Guidance

For the third quarter of 2026, management guided revenue to $1.65 billion–$1.75 billion, non-GAAP gross margin to 40%–42% (including $8 million of stock-based compensation), non-GAAP operating expenses to $303 million–$318 million (including $33 million of SBC), non-GAAP EPS to $0.81–$0.93, a non-GAAP other income net benefit of $18 million, a non-GAAP tax rate of about 15%, a non-GAAP share count of about 395 million, and capex of $40 million–$50 million. By end market, automotive is guided up low single digits, industrial relatively flat, and "Other" up high teens sequentially, with utilization flat to up. Full-year 2026 capex is expected below 5% of revenue.

Trajectory

Revenue declined year-over-year through 2025, running $1,469M, $1,551M, $1,530M, and $1,513M across the four quarters, before returning to year-over-year growth — up about 5% in Q1 2026 and 9% in Q2 2026 at $1,603.5M. The reported figures carry large one-off swings: Q1 FY2026 EBITDA was negative $42.9M and net income negative $33.4M on $329M of restructuring charges, while Q2 FY2026 EBITDA was $399.9M. On a non-GAAP basis gross margin has expanded sequentially for four quarters, from 38.2% in Q4 2025 to 38.5% in Q1 2026 to 39.3% in Q2 2026. The growth driver is AI data center inside the "Other" end market, which rose 34% sequentially in Q2 2026.

The Model

The model projects FY+1 revenue of $6,600M and EBITDA of $1,960M (a 29.7% margin), and FY+2 revenue of $7,650M and EBITDA of $2,524M (a 33.0% margin). The near-term figure sits modestly above the trailing-twelve-month revenue base of $6,197.8M, against management's guidance for AI data center revenue to more than double in 2026. The FY+2 step-up to $7,650M of revenue and a 33.0% EBITDA margin would rest on the drivers management has pointed to: the 800V DC content ramp, timed for end-2027 / beginning-2028, and Fab Right savings beginning in 2027.

Projections are the median of 5 independent model runs. The model’s revenue sits 5.7% above analyst consensus.

For the third quarter of 2026, management guided revenue to $1.65 billion–$1.75 billion, non-GAAP gross margin to 40%–42% (including $8 million of stock-based compensation), non-GAAP operating expenses to $303 million–$318 million (including $33 million of SBC), non-GAAP EPS to $0.81–$0.93, a non-GAAP other income net benefit of $18 million, a non-GAAP tax rate of about 15%, a non-GAAP share count of about 395 million, and capex of $40 million–$50 million. By end market, automotive is guided up low single digits, industrial relatively flat, and "Other" up high teens sequentially, with utilization flat to up. Full-year 2026 capex is expected below 5% of revenue.

What Could Go Right — and Wrong

Looking Ahead

Over the next twelve months the tests are sequential gross margin expansion into the Q3 guide of 40%–42%, the "Other" end market compounding with AI data center, and whether automotive holds its year-over-year growth on China content. Management has also pointed to vertical GaN revenue starting in 2027, the first Fab Right savings from the Mountain Top and Philippines divestitures in 2027, and the Synaptics acquisition closing mid-2027. The largest single lever, the 800V DC content ramp, does not begin until end-2027 or beginning-2028.

Financials

Annual Summary

Key Ratios (Trailing)

The Company

ON Semiconductor is a product-centric power and sensing semiconductor company organized into three reportable segments: Power Solutions Group (PSG), Analog and Mixed Signal Group (AMG), and Intelligent Sensing Group (ISG). PSG makes discrete, module, and integrated power devices — silicon carbide, silicon, vertical gallium nitride, and gate drivers — for high-efficiency power conversion. AMG makes analog and mixed-signal parts for power management, sensor interface, connectivity, and standard products. ISG makes imaging technology, including CMOS image sensors, image signal processors, short-wavelength infrared, and indirect time-of-flight sensors. The 10-K describes the offering as "intelligent power and intelligent sensing solutions that drive electrification, energy efficiency, safety, and automation in automotive, industrial, and other end-markets, including AI data center."

ON manufactures most of its own chips: management says it still does "over 60%" of manufacturing internally even after divestitures. The 10-K names four plants — front-end wafer fabs in Rožnov pod Radhoštěm, Czech Republic and Mountaintop, Pennsylvania, and two Seremban, Malaysia sites (one front-end, one back-end assembly and test). The company runs a manufacturing rationalization it calls "Fab Right," which takes capacity offline and divests subscale fabs; on the Q2 2026 call it announced the divestitures of its Mountain Top and Philippines facilities, expected to produce about $35 million of annualized savings. Management said about 12% of capacity was taken offline.

Business Segments

Competitive Landscape

ON competes in all three segments against larger, well-capitalized rivals, each named by segment in its 10-K. Management frames the competition around product performance rather than price: "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 business we play in." The company characterizes itself as "the only broad-based U.S. power semiconductor supplier with technologies spanning the full AI Power Tree" — a management description. On the supply side, Wolfspeed is both a named PSG competitor and ON's primary external silicon carbide substrate supplier, a concentration and a conflict.

Supply Chain

ON sits in the middle of the power semiconductor chain. It buys silicon carbide substrates, foundry wafers, and specialized equipment from a small supplier set, manufactures most of its own chips, and sells through distributors and directly to automotive, industrial, and AI data center customers.