ON Semiconductor Corporation (ON) Q3 2026 Earnings Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the onsemi Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Parag Agarwal, Vice President of Corporate Development and Investor Relations. Please go ahead.

Parag Agarwal: Thank you, Daniel. Good afternoon, and thank you for joining onsemi's third quarter results conference call. I'm joined today by Hassane El-Khoury, our President and CEO; and Thad Trent, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast, along with our third quarter earnings release, will be available on our website approximately 1 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 include 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 will make projections or other forward-looking statements regarding the 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-K, Form 10-Qs and other filings with the Securities and Exchange Commission and in our earnings release for the third quarter. Our estimates or other forward-looking statements might change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other events that may occur except as required by law. Now let me turn it over to Hassane. Hassane?

Hassane El-Khoury: Thank you, Parag, and thank you all for joining us this afternoon. Our third quarter results reflect continued strength in our business and the momentum we are building across our strategic growth markets with growth above seasonal trends, continued acceleration in AI data center and improving demand in industrial. We see particularly strong demand where power density is becoming the key differentiator from AI data centers and the grid infrastructure supporting them to energy storage and next-generation vehicle architectures. These are strategic markets where we focused our investments and are now seeing that strategy translate into revenue growth, margin expansion, share gains and new customer wins. AI data center continues to be our fastest-growing market, scaling more rapidly than we anticipated entering the year with new wins that started to ramp. In automotive, we continue to gain content and secure new platform wins in every region, while industrial demand continues to improve, led by power infrastructure and energy applications. In Q3, we delivered $1.72 billion of revenue, non-GAAP gross margin of approximately 41.2% and non-GAAP diluted earnings per share of $0.90, all above the midpoint of our guidance. The combination of stronger demand, improved mix and disciplined execution is driving meaningful operating leverage in our model with earnings growth significantly outpacing revenue growth. We remain supply limited in certain technology segments of our business, and we made the short-term decision in the third quarter and into the fourth quarter to allocate to markets where we see strong end demand like AI data center, industrial, which came in much stronger than we originally planned. In automotive, we are supporting all deliveries for end demand, but we are not supporting inventory replenishment backlog. As we balance supply and demand, we expect 2027 automotive growth to be in line with our long-term target. In AI data center, our revenue covers the complete power tree from power supply units or PSUs to low-voltage smart power stages near the processor, where increasing compute is driving greater power density requirements and higher semiconductor content. In the third quarter, our AI data center revenue grew 39% sequentially to $180 million, and we now expect to deliver approximately $620 million of revenue in 2026, an increase of 140% year-over-year. For 2027, we still expect our AI data center revenue to double over 2026 as we continue to ship with new product ramps. In the third quarter, we began volume shipments into multiple marquee platforms, including Google with both silicon carbide and silicon MOSFETs for PSUs and 54-volt to 12-volt applications. The transition to 800-volt architectures creates the next content opportunity for onsemi, moving AI data center power directly into our strength. Our comprehensive low-to high-voltage power portfolio spanning silicon, silicon carbide and vertical GaN remains a competitive advantage, allowing us to address direct conversion from 800 volts to the 54-volt, 12-volt and 6-volt rails required across the AI rack. As power systems become more complex, customers increasingly need solutions that go beyond individual components. At last month's OCP Summit, we showcased our 800-volt to 6-volt solution using our differentiated vertical GaN technology alongside our gate driver and MOSFETs to deliver industry-leading efficiency and world-leading power density for one of the most challenging conversions in the AI rack. The move to 800-volt high-voltage DC also accelerates the transition from mechanical to solid-state power disconnects for fast turn-off from solid-state transformers and circuit breakers to hot-swap applications. Our silicon carbide JFET portfolio delivers superior thermal performance and is already designed in and contributing to our data center revenue. At Investor Day, we talked about the investments we are making to build differentiated capabilities ahead of the inflection points in our markets, and we continue to do that as power density becomes increasingly critical across AI data center, automotive and industrial. One example is EPP, our embedded power platform introduced at Investor Day. EPP uses the silicon wafer itself as the package to solve electrical, thermal and mechanical constraints simultaneously. We are pleased with the customer interest in the platform since the announcement, reinforcing our conviction that power density is becoming an increasingly important differentiator across automotive, AI data center and industrial applications. EPP is already sampling to alpha customers across these markets and is manufactured using our 12-inch silicon process at East Fishkill. Today, we are also excited to announce the acquisition of Ferric, which further extends our capabilities into integrated voltage regulators or IVR and puts us in the leadership position for power delivery to the next-generation AI processors. As power requirements of AI processors continue to increase, IVR incorporates the complete power regulator, including controller, power switches, capacitors and magnetics in one thin package and places it closer to the GPU, reducing power losses and solving the power density problem at the core. Ferric offers the most compelling IVR solution in the industry with its industry-leading efficiency and transient response performance in an exceptionally compact footprint with best-in-class z-height. We expect Ferric to increase our market share in the Vcore stage of the AI data center power tree. While this is a multiyear opportunity for onsemi well beyond 2030, we are raising our 2030 AI data center revenue target by $500 million to greater than $3 billion. Moving on to our industrial business. The AI halo effect is driving momentum beyond the data center itself. We expanded hybrid EliteSiC and IGBT module wins with multiple lead customers, including Sungrow and Sineng, driven by the 99.3% efficiency platform we introduced last quarter. Also in our industrial business, we see increasing momentum in robotics and physical AI, an area where our capabilities in power and sensing are highly complementary to Synaptics. Demand from first-person view or FPV drones is driving increased shipments of our 2-megapixel and 8-megapixel Hyperlux image sensors, and we are engaged with more than 10 leading drone manufacturers. We continue to diversify across the robotics market and have secured multiple new design wins with leading U.S. humanoid makers across power, connectivity and sensing. For sensing, we are advancing our indirect time-of-flight or iToF technology to deliver world-class depth resolution of 1 millimeter up to 10x better than competing solutions, enabling the precise depth perception critical for robots to interact with the physical world. As physical AI scales, these applications bring together many of our core capabilities across power and sensing, creating a significant new content opportunity for onsemi. Turning to automotive. We continue to win new customer designs across all regions. As the industry moves toward electrification, higher level of autonomy and software-defined vehicles, the investments we have made in new products continue to expand our content per vehicle up to $2,000 as architectures evolve. These transitions create multiple vectors of content growth for onsemi even in a relatively flat SAAR. We continue to gain share in the North American EV market across traction inverter designs and new onboard charger platform wins in addition to the Treo-based 10BASE-T1S ramp we already started. Across European OEMs, we expanded our design wins across our power portfolio as they also started the transition to 48-volt zonal. In China, we continue to expand our leading position in high-end OEMs for their 900-volt electric vehicles with new 1,200-volt silicon carbide traction inverter wins at NIO for their flagship sedan and Geely Zeekr's rapidly expanding export model. As we look ahead, we are increasingly confident in the trajectory of the business. AI data center continues to scale rapidly, while improving demand in automotive and industrial, content gains and new platform wins create multiple vectors of growth. All these trends are converging around the areas where onsemi is differentiated in intelligent power and sensing and our disciplined execution positions us to translate that growth into stronger earnings and cash generation. I want to thank our employees around the world for their continued focus and execution. Their work is what enables us to deliver for our customers and create shareholder value. Now let me turn it over to Thad to provide more details on our results and guidance for the fourth quarter.

Thad Trent: Thanks, Hassane. We believe the recovery is gaining momentum, and we are in a fundamentally stronger position than in prior quarters. We have more content, a broader market opportunity and substantially greater earnings power. With much of the heavy lifting and investments behind us, we are positioned to convert revenue growth into earnings and free cash flow growth. In the third quarter, we continue to see this benefit in our financial results. Q3 revenue was $1.72 billion, above the midpoint of our guidance and up 7% sequentially. Non-GAAP gross margin expanded by 190 basis points quarter-over-quarter to 41.2% and non-GAAP earnings per share was $0.90, growing 4x faster than revenue growth year-over-year. During our Investor Day, we discussed having consistently invested ahead of major market inflection points, building capabilities organically and supplementing them through strategic M&A to accelerate time to market. AI data center is a clear example. As architectures evolve, we are continuing to strengthen our capabilities across the power tree to position onsemi to capture more of that opportunity. Today, we announced the acquisition of Ferric for $600 million, plus up to $175 million in earn-outs tied to the achievement of revenue milestones. As Hassane mentioned, Ferric puts us in a leadership position in power delivery for next-generation AI processors. We expect Ferric to be accretive to our growth and gross margin targets with EPS accretion at scale and no meaningful near-term financial impact. This is a multi-year opportunity, raising our AI data center revenue target by 20% to more than $3 billion in 2030 and continues to accelerate thereafter. We expect the transaction to close in the fourth quarter, subject to customary closing conditions. Additional details on the acquisition are available on our Investor Relations website. Turning to revenue for the third quarter. Q3 revenue was $1.72 billion, up 7% sequentially and 11% year-over-year. Revenue was $22 million above the midpoint of our guidance with growth in industrial and AI data center. Automotive revenue was $777 million, down 1% sequentially and year-over-year. The sequential decrease is primarily due to the reallocation of supply to the AI data center and industrial end markets. We expect automotive revenue to decrease high single-digit percentage points in the fourth quarter, reflecting continued supply reallocation as well as timing and phasing of customer deliveries. Q1 is expected to return to normalized levels as supply comes online. Industrial revenue was $467 million, up 10% sequentially and 9% year-over-year. We saw strength in energy infrastructure, factory automation and the broader industrial market. We expect industrial revenue to increase low double-digit percentage points in the fourth quarter. AI data center revenue was $180 million, up 39% sequentially and 175% year-over-year. Demand continues to accelerate, and we now expect our AI data center revenue to reach approximately $620 million in 2026, increasing mid-teens percentage points in the fourth quarter. In 2027, we expect this to double off a higher base. Please note, beginning this quarter, we are enhancing our disclosures by separately reporting AI data center revenue as a fourth market segment to provide greater transparency into this important growth driver for onsemi. You will see this in our supplemental materials on our Investor Relations website and in our 10-Q. Revenue for the other end market segment, now excluding AI Data Center, was $299 million, up 11% sequentially and 10% year-over-year due to normal seasonality in the Wireless segment. We expect our other revenue segment to increase high teens percentage points in the fourth quarter. Looking at the split between business units, revenue for the Power Solutions Group, or PSG, was $890 million, an increase of 7% quarter-over-quarter and 21% year-over-year. Revenue for the Analog and Mixed Signal Group, or AMG, was $597 million, an increase of 9% quarter-over-quarter and 2% year-over-year. Revenue for the Intelligent Sensing Group, or ISG, was $235 million, an increase of 3% quarter-over-quarter and 2% year-over-year. Moving to gross margin. GAAP gross margin was 41.4%, and non-GAAP gross margin expanded for the fifth consecutive quarter to 41.2% due to utilization improvements earlier in the year and favorable mix to new products. Utilization remained flat at 83%. We expect similar levels in Q4 with utilization increasing as we move into 2027 in response to improving demand signals. Our Fab Right strategy remains an important contributor to the long-term margin opportunity. In Q3, we closed the previously announced divestiture of a back-end facility in the Philippines, and we remain on track to close our divestiture of the Mountain Top fab exiting 2027. We are operating with a more focused and efficient footprint, creating additional opportunity for gross margin expansion over time. GAAP operating expenses were $335 million. Non-GAAP operating expenses were approximately $310 million. GAAP operating income was $378 million or 22% of revenue. Non-GAAP operating income was $400 million or 23% of revenue. GAAP net income was $314 million and non-GAAP income was approximately $354 million. Our GAAP tax rate was 21%, and our non-GAAP tax rate was 15%. GAAP share count was approximately 397 million shares, resulting in GAAP earnings per share of $0.79. Non-GAAP share count was approximately 392 million shares, resulting in non-GAAP earnings per share of $0.90. Turning to the balance sheet. Cash and short-term investments were approximately $4.4 billion at quarter end. Total liquidity was $5.9 billion, including $1.5 billion undrawn on our revolver. Cash from operations was $516 million and free cash flow was $489 million or 28% of revenue. Capital expenditures were $28 million or 1.6% of revenue, and we expect full-year capital expenditure to be approximately 2% of revenue. Inventory increased $22 million sequentially but declined on a days basis by 6 days to 186 days. Strategic inventory continues to drain, declining 7 days in Q3 and base inventory increased by 1 day as we continue to support higher demand. Distribution weeks of inventory declined to 9.9 weeks from 10.1 weeks in Q2 with sell-through continuing to support a healthy channel and mass market growth. We repurchased $20 million of shares in Q3 with activity limited by trading restrictions related to the Synaptics acquisition and renegotiations. Looking forward, let me provide the key elements of our non-GAAP guidance for the fourth quarter. As a reminder, today's press release contains a table detailing our GAAP and non-GAAP guidance. We anticipate Q4 revenue will be in the range of $1.715 billion to $1.815 billion, representing above seasonal growth of 2.5% sequentially at the midpoint. We expect non-GAAP gross margin to be between 41.5% and 43.5% and include approximately $8 million in stock-based compensation. At the midpoint, this represents 130 basis points of sequential expansion. Non-GAAP operating expenses are expected to be between $303 million and $318 million. This includes approximately $34 million in stock-based compensation. We anticipate non-GAAP other income to be approximately $27 million, favorable. We expect our non-GAAP tax rate to remain at 15% and our non-GAAP diluted share count to be approximately 392 million shares. This results in non-GAAP earnings per share in the range of $0.95 to $1.07, and we expect capital expenditures in the range of $40 million to $50 million. The fourth quarter outlook reflects continued demand momentum and another step forward in our model. Based on our current visibility, we expect this momentum to continue into 2027 with continued revenue growth and gross margin expansion as we scale our differentiated products and realize the benefits of our more efficient operating model. As we look ahead, the opportunity is about more than a recovery in demand. We have built a stronger business with significantly greater earnings and cash flow potential. Our portfolio is more focused; our manufacturing footprint is more efficient and our path to growth is capital efficient. As we exit the year, our priorities are clear: execute on the demand in front of us, scale our differentiated platforms and capture the large market opportunities ahead. We believe we are well positioned to deliver sustained growth and expand margins, creating long-term value for our shareholders. With that, I'll turn the call back over to Daniel to open up the call for questions.

Operator: [Operator Instructions] Our first question comes from Vivek Arya with Bank of America Securities.

Vivek Arya: Hassane, you have been sort of, I guess, rightly deemphasizing automotive in Q2 and Q3, and I think even in Q4 with this signaling of, I think, high single digit from what I heard. But then you suggested that next year, auto would go back to growing per your long-term target, which I think is up whatever, 9% or 10%. So I'm curious, does underserving that market have any market share implications longer term? And then where does the extra supply come from to start regrowing in that market from next year?

Hassane El-Khoury: Yes. So just one thing I want to correct the words you used. We're not deemphasizing the automotive market. Automotive remains strategic as an end market. And even in our 5-year outlook that we highlighted in Investor Day, automotive still is the largest market, and that's not going to change. What you're seeing today or this quarter and next quarter, what we've hinted at is short term in nature and it's supply-driven, not strategically driven. What I mean by that is we're not losing share because we're working closely with the OEMs, as I mentioned in my prepared remarks, we are supporting all of their end demand needs. What we are holding back, again, with conversations with them and alignment with them is their replenishment that they would have liked to see this -- during the quarters. We will resume shipment in Q1 as the supply comes online. The supply -- we've always had the supply coming online or increasing supplies in the technologies we've been constrained on. But you saw the results from industrial and AI data center even beat our guidance and our expectations. So in the short term, we decided to shift the mix a little bit, but that is not a strategic decision. Our strategy remains the same as we've highlighted at Investor Day. That's why we're reiterating 2027 resuming the growth, which tells you there's no share loss. It is purely a replenishment, not an end demand, and it's short term in nature.

Vivek Arya: Got it. And for my follow-up, maybe, Thad, if you could walk us through the puts and takes of gross margins Q3 to Q4 volume mix utilization. And then let's say, conceptually next year, if your auto industrial businesses grow according to the long-term growth rates you set out and data center can potentially double. How should we think about the potential for gross margin expansion for 2027?

Thad Trent: Yes, Vivek, our gross margin bridge doesn't change, right? It's -- the biggest driver in the gross margin expansion here in Q4 is utilization improvement. Now keep in mind, this is utilization improvement from 2 quarters ago, right? So you'll start to see that. You also start to see a little bit of the pricing impact that we've had where we've already had the headwind on the input costs hitting us, and so we'll start to see some of that pricing impact coming in as well. But the math of every point of utilization being 25 basis points to 30 basis points of gross margin improvement still holds. And that will be true as we go into 2027 as well. So as I mentioned in my prepared remarks, we expect further growth. We expect further utilization improvement as we go into '27, which then will continue to give us margin expansion throughout the year. Obviously, as we have revenue growth, that will help as well. And then the other piece that really starts to drive is the new products. So we get favorable mix, and we're already seeing that here in Q3 as the new products start to ramp at favorable margins. So we'll start to see that as a nice tailwind going in there, too. And then there's a little bit of the Fab Right with one of the divestitures that we've announced on the back-end facility. We'll see a little bit of that in '27. We'll see more of it in '28 from the Mountain Top facility, but that's a nice tailwind as we go forward as well.

Operator: Our next question comes from Blayne Curtis with Jefferies.

Blayne Curtis: I just wanted to follow up on the last one. So I'm assuming auto would have been up in December and it's down high single digits. So I'm just trying to understand the level of restocking that might have already happened in the December quarter. And I'm just kind of curious whether you see those trends increasing.

Hassane El-Khoury: Yes. I mean the trend is increasing. So there will be like -- think about it as there will be a catch-up because it's restocking, it's not really the end demand. The end demand, we are supporting. So there's no change to that. So you can assume some seasonality on top of it. But from a replenishment, the demand is not perishable. So we will -- you'll see that resuming in the first quarter as supply comes online. So it's purely a -- you can think about it as a quarterly timing. We're not guiding Q1. But once we get to Q1, you can see that some of it would have been in Q4 if you normalize it. I've always said in automotive or even in multiple markets that we service, I don't look at the quarter-on-quarter, and I don't read anything into it. I look at it from a trend perspective and the decisions we are making. So I'm not -- I have 0 concerns about the decisions we're making in automotive. They are the right decision for us to make as a company for -- to service the increased demand that we've delivered in industrial and AI data center in Q3 and looking out in Q4. And then we will resume to normalized supply and demand starting here in '27. And for the rest of '27, you'll see us deliver the long-term target again.

Blayne Curtis: And then data center business doubling again in '27 is pretty impressive. Just wondering if you had any broad strokes you could walk through in terms of the drivers of that.

Hassane El-Khoury: Yes. I mean, look, it's a lot of the broad strokes as far as across the power tree, which I've been saying for a few quarters that we've been doing design wins across the power tree from the high voltage all the way to the core. Those have started to come online and generate revenue. So we've already transitioned from design-in to design wins and now revenue. And then the breadth of customers, we've highlighted some customers in the past. Some customers, you can kind of draw a line to who they are. And it's across the power tree, meaning directly with the compute vendors when we're sitting on the board, but also with the supply chain when it comes from PSUs and so on, and we've highlighted those throughout the last few calls. All of these are starting to get maturity. We're ramping up -- we ramped up a few more in the third quarter here. We hinted at it at Investor Day as well. So that came in. So it's really execution, execution, execution, but more importantly, new products that we have been introducing over the last couple of years are starting now to deliver. And that ramp is what's going to continue in 2027 on top of the new stuff that we're going to ramp into revenue in '27 that we're doing design wins on now. And just to highlight, the doubling in '27, again, is off of the higher base that we just talked about today. So it's -- '27 is higher than what we expected even 90 days ago.

Operator: Our next question comes from Joe Quatrochi with Wells Fargo.

Joseph Quatrochi: Maybe just to follow up on that. The $500 million that you're increasing for your 2030 revenue target, is that all from the acquisition? Or is that also from just the base increasing from 90 days ago?

Hassane El-Khoury: This is tied to the acquisition.

Joseph Quatrochi: Okay. And then as a follow-up, as we think about just the cash outlay that's kind of in front of you in terms of this acquisition and then also Synaptics and you're raising some debt for that as well. But how do we think about just the use of free cash flow and capital returns in that vein?

Thad Trent: Yes, Joe. So we'll be using cash off the balance sheet from the Ferric acquisition. As we close the Synaptics acquisition, we will be focused on delevering. That will be our top priority. That's obviously after investing in the business as well. But we'll focus there, and we'll be opportunistic on buying back shares over time. But the intent here is to delever quickly.

Operator: Our next question comes from Tom O'Malley with Barclays.

Thomas O'Malley: My first is on industrial. It looks like it's well above seasonal in September. And then when you go into December, it looks like some very strong results again. Any sort of vertical that you would call out in industrial that's doing a bit better? Those are some impressive numbers in the back half. Just want to start there.

Hassane El-Khoury: Yes. I think I would call out the AI halo that we talk about, anything from energy. Think about it from the grid to the AI data center. So everything outside the walls of the AI data center has been very strong. It came in better than we expected. A little bit on the PMIs are improving, so the broad industrial. But if you ask me what is the beat and the outlook tied to is really the AI halo that we highlighted at our Investor Day is coming in as we expected and in the short term higher, which is the reason I mentioned servicing that ahead of some other markets.

Thad Trent: Yes. And the broader industrial is about 40% of the total industrial bucket, and we're seeing strength there as well. I think just as you're seeing PMIs improve.

Thomas O'Malley: Got you. And then Thad, second one for you is just you talked about the automotive revenue just being a bit lighter because of supply relocation, timing, phasing of customer deliveries. But it looks like the utilization is flat. So are you short external components? Because I would expect if you're not able to get more supply, like the utilization would continue to move up. You're saying kind of that's more next year. Maybe just describe the dynamic, like where are you seeing the constraints?

Thad Trent: Yes. Keep in mind that what you're seeing come out of the line today was utilization from 2 quarters ago when we were running at 77%. We ran at 83% last quarter. We're running at 83% going into Q4. So this is us catching up to that supply as you get cycle time through the fab in the back end. So that's where we have supply coming online. The supply constraints are in specific lines in certain areas. So it's not across the board or obviously, we'd be taking utilization up further. But as we look into next year and we see demand continuing to strengthen across all the end markets, we will be taking utilization up.

Operator: Our next question comes from Gary Mobley with StoneX.

Gaurav Saini: Gaurav Saini here on behalf of Gary Mobley at StoneX. So I just wanted to ask specifically about the utilization lever in the gross margin bridge. About half of the path to that 53% gross margin target you guys set out comes from utilization. So just given the restructuring and also the changes to depreciation, how should we sort of think about the incremental gross margin on each dollar of revenue from here on out?

Thad Trent: Well, look, the way you should think about the Q3 results is there's about 450 basis points of underutilization charges. Now again, you got to go back to the Q1 utilization of 77% for that. So if you take that, getting up to what is kind of peaking out for us, 92%, 93% somewhere in there, you can do that math on that 25 basis points to 30 basis points and you get to that 450 basis points. So to do the walk for everybody, getting from here to the 53%, you've got about 450 basis points of utilization improvement. You've got 225 basis points of Fab Right. I talked about the activities we're taking there. You've got another 400 basis points of mix and the new products kicking in, and I've already kind of talked about we're starting to see that hit the P&L, and we'll start to see a lot more of it next year. And then the last component is we've been raising pricing, but we haven't seen that necessarily fully hit the P&L. So there's a little bit of tailwind from there. So if you start to add all that up, you're getting right around that 53% long-term target.

Gaurav Saini: Got it. Okay. And you guys also talked a bit about just now the new product ramp in '27. I kind of wanted to double-click on that and the contribution we'll see in the fiscal year for next year. How should we sort of think about the revenue from vertical GaN, EPP and Treo as these new sort of layers of revenue that really didn't preexist before?

Hassane El-Khoury: Yes. So what you're going to start seeing is obviously, Treo will continue to ramp. Treo is already contributing to revenue this year. We already talked about vertical GaN contributing revenue in '27. And then you layer on top of that towards the end, EPP. But those are -- other than Treo that started to ramp last year. And obviously, we've been more than 2x as you kind of move forward from a smaller base. The other ones will start to ramp and will follow such a trajectory. So you can think about the base for 2027 as new products that we've had in '25 and '26 that will start contributing meaningfully, while the new products, we've introduced like EPP and vertical GaN to start in '27 and continue forward, all leading up to a more mature mix of new products towards that 2030-time line depending on auto or industrial.

Operator: Our next question comes from Chris Caso with Wolfe Research.

Christopher Caso: The first question is with regard to the Ferric acquisition. Can you talk to us a little bit about where that acquisition stands with regard to revenue and design wins and realizing you used that to take up your 2030 target. But as we look into sort of '27, '28, what can we expect from that business?

Hassane El-Khoury: No. Look, I'm not going to give a guide to revenue as far as the acquisition or '27 at this point. But I will tell you, during the diligence that we've had, obviously, we all know from a market, ourselves and all of you know the trajectory that IVR has taken that it is the solution for higher and higher power of AI processing. That's point number one. We know integration, power density and the criticality of the z-height is important. And Ferric has been engaged with all of the hyperscalers from a design and platform architecture perspective. That's from the technology and the capabilities that they bring. We bring the scale, manufacturability and, of course, the breadth of our reach within the hyperscalers, but also the compute platforms. That's the combination that makes this strategic. But from an engagement perspective, they are engaged and in a very good position with all of the hyperscalers based on our touch point on the diligence that we've done with the team. And of course, it brings in a high-caliber, talented team that complements our own internal efforts, and that's the win-win.

Christopher Caso: Got it. As a follow-up, I've got a question on CapEx and capacity as you go into next year. And correct me if I'm wrong on this one, but it sounds like some of the supply constraints you're facing now is just a function of not having started the wafers earlier in the year. And so now you're catching up. So I guess if that's the case, where do you stand with regard to capacity as you go into next year? Do you think you have the capacity to be able to meet what you see for the market next year? And then from that, what sort of CapEx should we be expecting as you head into next year?

Thad Trent: Yes, Chris, I think that's a fair characteristic, that this is a catch-up, right? And that's why Hassane talked about this as being temporary. We'll catch up in Q1. So we do have the capacity that we need based on the outlook that we have today and even some upside to that outlook. So I don't think we're going to be anywhere near capping out our capacity as we go into 2027. This year, our CapEx intensity is about 2% of revenue. I expect it to be about 5%, in line with our long-term model next year. That will give us the ability to bring in not only maintenance capital, but a little bit of capacity where we need it on certain lines where we can get higher throughput. But we believe we're in a really good spot for a market that's going to grow in 2027 and even beyond that in terms of just the capacity we have online.

Hassane El-Khoury: Yes. And the capacity that we talk about that will contribute to catching up in Q1, you can think about this as the capacity was -- is already behind us and the investment is behind us. It will just come online and deliver in -- think about it in 2027. So it's not something that we're looking forward. It's something that we've done, and we're just going to get the benefit just from the latency perspective.

Operator: Our next question comes from Jim Schneider with Goldman Sachs.

James Schneider: Hassane, I was wondering if you could maybe characterize the OEM customers' behavior in terms of their willingness or interest in restocking. I think you referred in your prepared comments to automotive customers are not supporting restocking but only supporting increases in end demand. Can you maybe sort of broadly describe what's happening with those customers and then the broader OEM customer set with respect to taking on more inventory in the balance sheet?

Hassane El-Khoury: Yes. So I'll -- first, I'll characterize it as specific to OEMs. It's not all OEMs are behaving the same way. So I can only reference the ones that we've been engaging with that have demand. And they're looking at it as they see the writing on the wall. AI and industrial is recovering, and they're trying to place demand, so they're not caught in traffic as far as capacity and capacity constraint because they see it across the board, not just on power semis that we see, but across analog, compute and of course, the memory. So they're looking at their 2027 plans, and they want to think about it as have a what I would call a business continuity plan or BCP as known in the industry. Those are strategic plans that we do with our strategic OEMs where we sit down and figure out kind of their capacity and their pull rate, and we build ahead of that. Normal standard procedure as far as replenishment ahead of the ramp. That's why we're having these conversations as far as we're not going to build it all in Q3 and Q4, which we made that decision. We will continue to ship demand, knowing that the backlog is now on the books and we'll service that, and that's what we've built the new capacity model towards. That's why it's a temporary in nature, it's short term, and we'll catch up in the '27.

James Schneider: And then maybe just as a follow-up, your remaining other subcategory seems to be actually growing very, very well even when you take away the data center, re-bucket it into its own category. Can you maybe talk about some of the -- what's driving the other category that remains? And what -- can you kind of extend that growth rate into 2027 or why or why not?

Thad Trent: Yes. The other bucket for us, we play opportunistically, right? In the prepared remarks, we talked about Q3 as being seasonal with the wireless end market that's in that bucket as well. When we look into Q4, we have a large customer ramping program. So it's a little lumpy. I think that's why Q4 is up to mid- to high teens. As we go into next year, no, I wouldn't expect it to grow at that. I think you're going to see the AI data center and the automotive and industrial grow at a much faster rate and that to be a little bit more in line with normal historical rates there as we focus on the other markets. And by the way, the Q4 ramp that I'm talking about is manufactured externally. So you're not seeing an impact of that. That's why we're able to support that.

Operator: [Operator Instructions] Our next question comes from Tristan Gerra with Baird.

Tyler Bomba: This is Tyler Bomba in on for Tristan. Is there any inventory replenishment embedded in the strength in industrial? You talked about not allowing replenishment in auto, but curious what you're seeing in industrial.

Hassane El-Khoury: No. So the strength in industrial is really coming from the AI halo, as I mentioned in a prior answer. And the AI halo, we see end product going out in the market. So we can see the sell-through, not just the sell-through from us to customer, but the sell-through from customers to their end customers. If you look at the large industrial names that do kind of grid to data center, they have all had really good quarters for the ones that announced so far. And we see that as well as far as what they're building. So that's why we're allocating when I say it's going to truly end demand, which is stuff getting deployed on sites. So that's not an inventory replenishment. It is purely an increase in demand that is getting installed as fast as possible in end sites.

Tyler Bomba: Great. For my follow-up, how should we think about the geographic mix of silicon carbide growth in '27 and the underlying contribution from new platforms and content gains versus just a recovery in the underlying EV production?

Hassane El-Khoury: I think it's very broad in nature. Of course, from an EV perspective, China remains a strong pull for silicon carbide. But also a big growth in new products on silicon carbide is coming from North America with AI data centers. And of course, JFET specifically that I called out in my prepared remarks, that primarily is going into AI data center. So I would say since the EV diversification we've had geographically and end customer, we are adding now a very broad AI diversified market for silicon carbide, both by application, customer and geography.

Operator: Our next question comes from Tore Svanberg with Stifel.

Tore Svanberg: Yes. Hassane, I wanted to go back to what you mentioned about the business continuity plans. I mean we all know that the capacity, especially for AI data centers has been tight for a while, right? So I'm just curious what's driving the auto OEMs to be willing to restock right now? And it must be a sign that their demand is really starting to accelerate? Or do I get that wrong?

Hassane El-Khoury: No. I mean I don't know about accelerate, but I think there is demand that they are working on. Remember, for us, it's not just the SAAR, it's the content. So as you heard in my prepared remarks, Europe is moving into the 48-volt and zonal, that creates a higher demand opportunity from a content perspective, not necessarily vehicle units. Mix of EVs is higher, which is more content. So you can think about it, demand that I refer to from our side is content. So when we talk about resuming to our long-term model, which is high single digit over SAAR, that's the one I'm referring to. That's what the OEMs place orders for. It's -- they see their content growth in their new platforms that they are introducing, not necessarily a SAAR or unit. So that's what I want to be very clear. Inventory for us is content in the car.

Tore Svanberg: Yes. That's very helpful. And as my follow-up on Ferric, so I think there's a lot of companies positioning in IVR right now. And I was just hoping you could share with us a little bit what's the uniqueness that Ferric brings? I know in your presentation, you talked about better magnetics, smaller footprint and so on and so forth. But yes, anything else that you could share with us why their technology is sort of the winning formula versus what we've seen from other companies?

Hassane El-Khoury: Yes. So if you think about what the solution -- what the end solution needs in order for it to be viable from an IVR perspective, there's a thermal, a mechanical and an electrical. From an electrical perspective, we know Ferric has a superior transient performance than anything else in the market. So that covers the electrical. That's important because of the dynamic load that high-end processors are driving, where you got a lot of transient and the voltages have to regulate or respond to it. So that provides a superior electrical performance versus peers or competitors. Then you have the mechanical side of it, which is the power density, where there are other solutions that are not necessarily magnetic. There are other innovative solutions out there, but the solution from Ferric with electro and magnetic components of it with the controller, that gives you the most dense from an area and the most compact from a z-height. The -- you can think about everybody's z-height is in the 2.5 millimeter. Ferric blows that away. So that is extremely important when you're talking about truly integrated or IVR specifically, not outside of the package and so on. So that's key. And then the last one is the thermal. With the efficiency that the first 2 provide, the thermal becomes a lesser of a problem to resolve with the GPU or the compute vendors. Those 3 components, the Venn diagram, if you put all of them together, Ferric is the one in the middle. That's why we like it. That's why we wanted that asset rather than comparing to everything else.

Operator: This concludes the question-and-answer session. I would now like to turn it back to Hassane El-Khoury, President and CEO, for closing remarks.

Hassane El-Khoury: Thank you for your questions. We are focused on the areas where the challenges are getting harder and where our differentiation matters most. Power density is becoming critical across AI data center, automotive and industrial, and our investments in high-voltage technologies, Treo-based solutions and EPP enable us to solve those challenges at the device, platform and system level. Combined with the leverage in our operating model, we believe that positions us to drive profitable growth, stronger cash generation and long-term shareholder value. Thank you for joining us today.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.