ON Semiconductor Corp Technology Leadership Forum 2026

Sure. The comment I made, obviously, we also framed it into a temporary adjustment that we have made, not a strategic redirect. We expect that to normalize, call it, over the next couple of quarters when the impact of utilization that we took up will start coming out from material. To answer your question more directly, at a product level, it is not fungible. When I would call a product is when the product is fully assembled, because then it is a footprint, it has to go on a certain board, a certain physical form. From a fab perspective, not just from a fab, all the way to technology, it is fungible. When we talk about 1,200 volt silicon carbide, it is the same 1,200 volt that we supply, for example, in automotive or in 800 volt systems in AI data center.

It is fully fungible up until it gets to almost die, which is 2 weeks away from finished goods, if you think about a 2-week cycle time for a finished good. All the way up until that point where it gets its, call it, marketing part number, or MPN, it is fungible. That is the decision we made. When you get orders in short time and you have to make priority calls, as long as those priority calls are on a 2-week. If it is packaged and it is kind of ready to go, you cannot just change the mailing address. That is the flexibility. Compare that 2-week change in end product to a little over 30 weeks of lead time, we are able to make those decisions while we start those new wafers for the auto and industrial orders that we got.

That takes about, call it, 3 to 6 months to come out. That is why I said it will normalize in the next couple of quarters, just a matter of time. You saw utilization went up, so we already took utilization in response to that demand, but the output is yet to come.

No, we have the capacity. We talked about we took utilization up to 83%. Fully utilized, you can think about it in the 92%-93%. We are not fully utilized. We did a step function based on the demand that we saw, but that is not fully utilized, meaning we are not capped out on capacity. What we are managing now is the slope of the orders that came in. If you get a lot of orders within 13, let us say everything is at 30 week lead time, if you get a lot of short lead time orders, you are just not going to service them, just a matter of fact from a lead time perspective. It is not like we cannot do the capacity and we need more CapEx. Our CapEx remains unchanged. CapEx remains mid-single digit.

We will take up utilization as we see demand coming in, and even when we get to that 92%-93% utilized, we can flex to the outside. It is not like CapEx is going to have another CapEx cycle built in here.

Great. We feel pretty comfortable with the growth trajectory that we have for the company overall and the flexibility we have.

Remember, as utilization goes up, the margin gets the tailwind from the utilization, and that is our short-term margin expansion, and you start to see it in Q3, even throughout this year.

Yeah, utilization's going to be the primary driver. If you think about where we've gone with utilization, exiting last year, we were at 68%. Last quarter, we were at 83%. So you can see how quickly we've taken that utilization up. Every point of utilization is 25 to 30 basis points of gross margin improvement just two quarters later, right? So you saw our margins step up in Q2. We guided a significant step up in Q3. I expect more because of the utilization tailwind. I expect more in Q4. Based on the visibility, we're getting much better visibility than we were a year ago from our customers, so we got good visibility into 2027. In some cases, we have customers even starting to layer in backlog into 2028. So it gives us that confidence that utilization will continue to improve.

Now, we will get over that hump, as Hassane said, kind of that cycle time, that fab cycle time, but I expect further gross margin improvement into next year as well. The one thing that we've had as a headwind is the input cost to hit the P&L where the pricing hasn't yet. We did our first round of price increase April 1st. We're doing a second round now. That'll take several quarters for it to fully layer in, but that's a nice tailwind kind of in the short term. Longer term, let me back up to Q2. Q2 had 650 basis points of underutilization charges. So if you get from that 83 to 92, 93, there's 650 basis points right there if you just do the math that I was giving you. So you've got that as a tailwind.

You've got the FabRight initiatives, so we've said that's about 200 basis points of gross margin improvement. We announced last quarter the divestiture of two manufacturing sites. That's 50 of the 200 basis points. Some of that will start to layer in in 2027, most of it in 2028. We have favorable mix, so we'll talk about the products, the differentiated products. So over a multiyear period, there's another 200 basis points of improvement there. Then if you go back to the fab divestitures that we did a few years ago, we built that bridge inventory that we're burning through. You can see we actually burned through quite a bit of that last quarter. As we start manufacturing that insight, that's another 200 basis points. So if you start doing that math, you get over 50% pretty quickly. Utilization is the biggest short-term driver, though.