ON Semiconductor (ON) Q3 2025: AI Revenue Hits $250M, Driving Power Portfolio Differentiation
ON Semiconductor’s Q3 revealed a pivotal inflection as AI data center revenue reached $250 million, now 4% of total sales, underscoring the company’s differentiated position in power delivery. Management’s disciplined capacity moves and mass market expansion are stabilizing core segments, even as restocking remains absent and macro uncertainty lingers. Forward focus is on leveraging unique vertical integration and IP to capture outsized share in automotive, AI, and next-gen power markets.
Summary
- AI Power Tree Differentiation: ON’s full-stack power delivery portfolio secured share in AI data centers, with $250 million revenue proof point.
- Inventory and Utilization Discipline: Die bank build and mass market expansion balanced against low inventory and cautious demand signals.
- Restocking and Macro Uncertainty Persist: Core markets stabilize, but no broad restocking or visibility surge yet as geopolitical and demand signals remain mixed.
Performance Analysis
ON Semiconductor’s Q3 performance was marked by stabilization in core automotive and industrial segments, with management emphasizing the emergence of “seasonal trends” as a positive sign after several quarters of volatility. The company’s AI data center business was sized at $250 million for the year, or about 4% of total revenue, reflecting rapid share gains as ON positions itself as one of only two players capable of delivering power from “wall to core” in data center applications. This is a strategic validation of ON’s investments in silicon carbide and vertical integration, especially with the V-Core acquisition and differentiated JFET silicon carbide technology.
Utilization rates increased to 74% in Q3 as ON built die bank inventory for the mass market, with CFO Pat noting inventory days at the low end of target (112 days) and a $39 million sequential decline in inventory despite the die bank build. The mass market segment, comprised of small and emerging customers largely served through distribution, now represents roughly 25% of distribution revenue and has grown customer count by 20% year over year. Automotive and industrial segments both saw low single-digit declines guided for Q4, but management cautioned not to overinterpret quarterly lumpiness, attributing it to project ramps and market timing rather than structural change.
- AI Data Center Revenue Emergence: $250 million annualized run-rate validates ON’s differentiated “wall to core” power delivery stack, with share gains against longer-tenured incumbents.
- Inventory and Utilization Management: Proactive die bank inventory build for mass market, with utilization expected to normalize in Q4 as builds complete, and inventory days held at disciplined levels.
- Automotive and Industrial Visibility: Stabilization but no restocking; project timing drives quarterly swings, with China EV and global OEM diversification offsetting brand-specific volatility.
Strategically, ON’s results highlight disciplined execution in capital allocation, margin expansion, and portfolio focus, as well as the early fruits of technology investments in silicon carbide and vertical GAN.
Executive Commentary
"We expect the AI data center for us to continue to grow. We look at ourselves as really the share gainer from some of the companies that have been in that market longer than we have. So being able to post $250 million or about $250 million revenue is pretty stellar... if you take that quote-unquote crowded space of 13 or however many companies and you look at who can go from wall to core, there's only two. And we are the share gainer. We're one of the two."
Hassane El-Khoury, President and CEO
"The structural changes we have made across our portfolio, operations, and manufacturing footprint are driving margin expansion and positioning ON for long-term earnings power. With over 100% of our year-to-date free cash flow returned to shareholders, we continue to prioritize capital efficiency and shareholder value while investing in innovation and differentiation."
Pat, SVP and CFO
Strategic Positioning
1. AI Data Center Power Stack: Wall-to-Core Integration
ON’s unique capability to deliver power from wall to core in AI data centers sets it apart, leveraging its JFET silicon carbide and V-Core acquisition to address the entire “power tree.” Management emphasized that only two companies can offer this vertical integration, positioning ON as a share gainer as AI infrastructure demand accelerates. The $250 million AI data center revenue this year is a direct result of this strategy, with ongoing product expansion and customer wins in both data center and automotive electrification.
2. Silicon Carbide and Vertical GAN: Technology-Driven Share Gains
Silicon carbide (SiC), a wide bandgap semiconductor material, remains a core growth vector, with ON gaining share in China EV and new applications like plug-in hybrids and AI power supplies. The company’s vertical GAN (gallium nitride) technology, acquired and developed in its Syracuse fab, is positioned for high-reliability, high-voltage applications, solving die size and reliability barriers that have limited lateral GAN in the past. Sampling is underway with lead customers, and commercialization is targeted for 2027, with ON claiming a first-mover advantage in vertical GAN sampling.
3. Mass Market and Distribution Expansion
ON’s mass market strategy targets small and emerging customers through distribution, with this segment now roughly 25% of distribution revenue. Customer count increased 20% year over year, and the company is building die bank inventory to enable rapid response to demand spikes. This segment is high-margin and diversifies end-market exposure, supporting ON’s margin and growth ambitions as the broader market stabilizes.
4. Portfolio and Non-Core Business Exits
ON is executing on previously announced exits of non-core businesses, with $45 million exited in Q3 and $55 million targeted for Q4. These exits create a $200 million annual headwind this year and $300 million next year, or about 5% of 2025 revenue not repeating in 2026. The focus is on portfolio quality and margin expansion, with management reiterating no change to this exit plan.
5. Capital Allocation and Margin Expansion
ON returned over 100% of year-to-date free cash flow to shareholders, while maintaining disciplined CapEx and operating expenses. Gross margin expansion is structurally linked to utilization, with every point of utilization translating to 25-30 basis points of margin improvement. The company targets 37-39% non-GAAP gross margin for Q4, with longer-term margin upside tied to demand recovery and utilization normalization.
Key Considerations
This quarter marked a transition from volatility to stabilization, but ON’s forward trajectory relies on several strategic levers and external dynamics:
Key Considerations:
- AI and Electrification Content Growth: AI data center and automotive electrification are expanding ON’s addressable market, with technology differentiation in power delivery and silicon carbide driving share gains.
- Restocking Cycle Remains Elusive: Despite stabilization, no broad-based restocking has materialized; OEMs and distributors cite the need for stronger demand signals and geopolitical clarity before rebuilding inventory.
- Non-Core Exits to Pressure Top Line: Portfolio pruning will create a $300 million revenue headwind next year, requiring core growth to offset lost sales and maintain operating leverage.
- Utilization and Margin Linkage: Utilization-driven margin expansion remains central, with Q4 utilization expected to normalize after die bank build, and each utilization point translating to margin leverage.
- Vertical GAN Commercialization Timeline: Vertical GAN represents a potential breakthrough, but revenue contribution is not expected until 2027, requiring patience from investors tracking new technology inflections.
Risks
ON faces persistent risks from muted restocking, macro and geopolitical uncertainty, and exposure to volatile end markets such as China EV and industrial solar. Non-core exits will pressure reported growth, and the timing of AI and vertical GAN revenue ramps remains uncertain. Management’s cautious tone on visibility and restocking highlights the potential for continued lumpiness if demand signals do not strengthen.
Forward Outlook
For Q4, ON guided to:
- Revenue of $1.48 billion to $1.58 billion
- Non-GAAP gross margin of 37% to 39%
- Non-GAAP EPS of $0.57 to $0.67
- CapEx of $20 million to $40 million
For full-year 2025, management maintained its outlook for:
- Non-core business exits totaling $200 million headwind this year, $300 million next year
Management highlighted several factors that will shape results:
- AI data center and automotive electrification as primary growth vectors
- Utilization normalization post die bank build, with margin leverage tied to demand recovery
- Continued portfolio focus and capital returns to shareholders
Takeaways
ON’s Q3 signals a shift from turbulence to stabilization, with AI and electrification driving incremental growth and margin opportunity even as restocking and macro clarity remain elusive.
- AI Power Stack Emergence: $250 million in AI data center revenue validates ON’s differentiated technology and positions it for future share gains as the market scales.
- Disciplined Execution: Utilization and inventory management, alongside mass market expansion and non-core exits, are driving structural margin improvement and capital efficiency.
- Watch for Demand Reacceleration: The next phase of upside hinges on a restocking cycle and broader demand recovery, especially as new technologies like vertical GAN move toward commercialization.
Conclusion
ON Semiconductor’s Q3 2025 results underscore the company’s evolution into a differentiated power solutions leader, with AI, automotive, and mass market channels driving stabilization and future growth. Investors should monitor the pace of restocking, margin leverage from utilization, and the commercialization of breakthrough technologies as key catalysts for the next leg of value creation.
Industry Read-Through
ON’s results offer a window into the broader semiconductor landscape, where AI infrastructure and electrification are expanding addressable markets and rewarding players with differentiated power delivery portfolios. The lack of a restocking cycle and persistent macro caution echo across the sector, suggesting that inventory normalization and demand visibility will be gating factors for a broader recovery. Competitors in silicon carbide, GAN, and mass market power should note ON’s aggressive technology investments and capital discipline as a template for navigating cyclical volatility and capturing secular growth.