ON Semiconductor Corporation Q4 2025 Earnings Call Transcript

ON Semiconductor Corporation (NASDAQ: ON) Q4 2025 Earnings Call dated Feb. 09, 2026

Presentation

Operator

Good day everyone and welcome to Onsemi’s fourth quarter 2025 earnings conference call. At this time all participants are in a listen only mode. After the speaker’s presentation there will be a question and answer session. To participate you will need to press star 11 on your telephone. You will then hear a message advising your hand is raised to withdraw your question. Simply press star 11 again. Please note this conference is being recorded now. It is my pleasure to turn the call over to the Vice President of Investor Relations and Corporate Development, Parag Agarwal. Please go ahead.

Parag Agarwal — Vice President of Investor Relations & Corporate Development

Thank you. Carmen Good morning and thank you for joining OnSME’s fourth quarter and full year 2025 results conference call. I am joined today by Hassan Al Khoi, our President and CEO and TED Turn, our cfo. This call is being webcast on the Investor Relations section of our website@www.onsemi.com. a replay of this webcast along with our fourth quarter and full year 2025 earnings release will be available on our website approximately one 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 information includes 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 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 defined and described in our most recent Form 10 case, Form 10 QS and other filings with the securities and Exchange Commission and in our earnings release for the fourth quarter and full year 2025. Our estimates or other forward looking statements might change and the Company assumes no obligation to update forward looking statements to reflect actual results, change assumptions or other events that may occur except as required by law. Now let me turn the call over. To Hassan Hassan

Hassane El-Khoury — President and Chief Executive Officer & Director

thank you Parag. Good afternoon and thank you all for joining us on this first call of the year. In 2025, amid a challenging demand environment, we delivered $6 billion of revenue and non GAAP gross margin of 38.4%. By staying disciplined in our execution and tightly aligning to our long term strategy with focused investments, we advance our technology leadership while positioning ourselves better in the growth markets that define our future. We strengthened our portfolio through organic investments, acquisitions and partnerships. We launched a multi market growth engine with our Trio platform. We delivered more than $250 million in AI data center revenue across the power tree.

We expanded our content in automotive for zonal architecture. We further optimized our cost structure through Fabright actions and we returned $1.4 billion of free cash flow through share repurchases. Over the last five years of our transformation, we have evolved from a manufacturing company to a product centric company, launching more breakthrough products than we had in the prior decade and strengthening our portfolio with technologies that position us to win the most critical market transitions. Our disciplined investments combined with our Fabright actions have created operating leverage in our model and set the foundation for long term growth and margin expansion.

On the new product front, market proliferation continues with our Treo platform. We doubled the number of products sampling year over year, reinforcing TREO as a key contributor to our long term mix shift towards high margin product revenue and supporting our new design funnel which is now over a billion dollars. Treo is already being designed into a broad set of automotive applications including zonal architectural, ultrasonic sensors and LED drivers and we are proliferating into industrial applications like H Vac energy storage systems or ESS and medical with customers like Dexcom who designed our low power analog front end in their continuous glucose monitors or cgm.

We broaden our leadership in wide band gap technologies by introducing our lateral and vertical GAN or VGAN strategy with a differentiated product roadmap solving our customers problems at favorable margins. This year we are preparing to sample more than 30 Nugan devices spanning 40 to 1200 volts including both discrete devices and integrated driver plus GAN solutions to deliver lateral GAN to the market. We announced new foundry partnership to broaden regional supply options and giving us the product breadth and manufacturing flexibility to serve high growth applications with revenue beginning in 2026 for VGAN. We are already collaborating with GM on the development of electric drive systems.

As a reminder, VGAN is built on proprietary GAN on GAN technology is manufactured in our FAB in the US and positions us for multi year competitive advantage in high voltage and high power density applications and spanning AI data centers, EVs, renewables and aerospace, defense and security. We expect first VGAN revenue in 2027. Turning to the demand environment, we are seeing seasonal patterns and are encouraged by improving order trends across our core markets, contributing to fourth quarter revenue of $1.53 billion, non GAAP gross margin of 38.2% and earnings per share of 64 cent, both exceeding the midpoint of our guidance.

Automotive inventory digestion is largely behind us. AI Data center is increasingly becoming a meaningful growth engine for the company and we believe we have seen the bottom for industrial with global PMI trends pointing to early signs of expansion in automotive, we continue to expand our content as the industry accelerates towards a zonal architecture for software defined vehicles and autonomous driving. We are proliferating our 8 megapixel image sensor for front facing vision and have introduced our trio based advanced ultrasonic sensors for ADAS in zonal. We have already exceeded $400 million in design funnel for our smart FETs, E fuses and 10 based T1s Ethernet transceivers as customers re architect their vehicles.

Most OEMs have already started their migration towards zonal and industry estimates suggests that in the next five to eight years nearly 40% of new vehicles will feature this architecture. All of this is incremental to our existing leadership in silicon and silicon carbide devices and XEVs in industrial. We are expanding our opportunity in machine vision, factory automation, drones and robotics with new families of image sensors with competitive performance, differentiated features and strong interest from customers seeking a U S based supplier in aerospace, defense and security. Revenue increased 70% year over year driven by North America and Europe.

We secured a strategic design win for a solid state circuit breaker using our Sig jfet demonstrating our ability to win in high barrier industrial segments where mission critical performance depends on resilient reliable power distribution and optimized size and weight. Turning to our AI data center business, as previously mentioned we delivered more than $250 million in revenue in 2025. With the rapid expansion of AI compute infrastructure and our unmatched ability to deliver power efficiency across all stages of power conversion, this market remains one of the strongest and fastest scaling opportunities for us. Over the last year we have reinforced our role as the only broad based US Power semiconductor supplier addressing power density bottlenecks that limit AI growth, aligning with national priorities for resilient AI infrastructure.

With a broad portfolio of silicon, silicon carbide, Sig, JFAD, GaN and our newest VCORE assets, we are perfectly positioned to deliver the power efficiency requirements our customers need going through the powertree Starting outside the data center, we lead the utility strength ESS market with more than 50% worldwide share. We are ramping our IGBT hybrid power module to multiple global customers and seeing strong interest in our next generation SICK MOSFET hybrid power module delivering even higher power efficiency nearing 99.5% and the highest power density at 430 kilowatts. With a first win at Sungrow in their global platform, we are already sampling our 1200 volt ultra low RDS SIG JFET for AI data center platforms and our AI data center funnel is increasing as AI workloads scale and more platforms move to higher voltage bus architectures, expanding opportunities from power supplies to battery backup, disconnect and hot swaps.

At the UPS stage, we want a high end design with a leading US Power supply supplier that cuts their system footprint by about 50%, using our sick power module to increase power density and improve thermal performance. We expect production volumes to begin this quarter. At the rack level, we have secured designs for our SIC and Silicon MOSFET and our SIC JFET in both the BBU and and PSU systems with Delta Light on and greatwall to serve both their Western and China customers. As the AI ecosystem continues to build out at the XPU board level, we extended our reach by securing several next gen design wins with our multi phase controllers, smart power stages and point of load devices.

We began sampling our dual 5×5 vcore solutions as well as two phase power modules using a next generation regulator architecture that dramatically improves transient response for AI and server processors referred to as TLVR for transinductor voltage regulator. As we integrate our recently acquired VCORE assets, we are strengthening our portfolio and positioning ourselves to win the next generation architectures. As we move into 2026, we are encouraged by a market environment that is showing clearer signs of improvement across automotive, industrial and AI infrastructure. The groundwork we have laid out over the last several years has positioned us to benefit as demand conditions continue to get better.

Our portfolio is aligned to the highest growth opportunities in power and sensing, our manufacturing footprint is structurally stronger and our customer engagements are deeper and more strategic. I’ll now turn it over to THAD to give you more details on our results and guidance for the first quarter.

Thad Trent — Executive Vice President and Chief Financial Officer

Thanks Hassan in 2025, our teams remain focused on discipline, execution and long term value creation for all stakeholders. Against a backdrop of uncertainty and limited demand visibility, we strengthened our financial foundation through structural cost actions, tighter operational rigor and a relentless focus on expanding our customer base. These efforts allowed us to navigate the macro environment, maintain our strategic investments in intelligent power and sensing, and position the company for margin expansion as market conditions improve, there are three key areas I’d like to highlight as we exit 2025. First, we delivered record free cash flow margin of 24% in 2025.

Free cash flow increased 17% year over year to $1.4 billion due to tight expense control and lower CapEx as our large capacity investments are behind us. We returned approximately 100% of our free cash flow to shareholders through share repurchases in 2025, demonstrating a disciplined capital allocation strategy and we also announced a new $6 billion share repurchase program in November after repurchasing $2.6 billion under the prior program that expired at the end of 2025. Second, we are improving the quality of our revenue and margins through investments in differentiated products. We have been reshaping our product mix through targeted investments, improving long term margin potential while supporting our leadership in high growth markets.

We continue to rationalize our portfolio by exiting volatile non core businesses while reallocating investments to differentiate power sensing and analog mixed signal technologies. And the third point, we have positioned the company for margin expansion by aligning our manufacturing footprint and product mix, enabling meaningful operating leverage in our model. As part of our Fabright strategy, we reduced our fab capacity in 2025 by 12%. As we improved our operational efficiency in the fourth quarter, we announced additional measures to further rationalize our manufacturing footprint. These actions together will lower our 2026 depreciation by approximately 45 to $50 million and we expect to see the gross margin impact in the second half of the year.

Our Q4 gross margin includes approximately 700 basis points of underutilization charges which will dissipate with increasing utilization as market conditions improve. These actions, along with other operational improvements position us for margin expansion in 2026. As we look ahead, our financial priorities remain consistent, drive sustainable and predictable results, expand margins and increase earnings and free cash flow. Shifting to results for the fourth quarter, we met the midpoint of guidance with revenue of $1.53 billion in line with normal seasonality. Automotive revenue was $798 million, up approximately 1% quarter over quarter. We continue to see stabilization in the automotive market as much of the inventory digestion is behind us.

Revenue for industrial was $442 million, up approximately 4% quarter over quarter, driven largely by the traditional industrial business and Factory automation. Following eight quarters of year over year declines, Q4 marked the first quarter of year over year growth in our industrial revenue increasing 6% over the fourth quarter of 2024. Our AI data center revenue, which is classified in the other segment, grew quarter over quarter and contributed more than $250 million for the full year. For the fourth quarter, revenue for the other category decreased 14% quarter over quarter due to seasonality and soft demand conditions in areas outside of AI Data center.

Looking at the fourth quarter split between the business units, revenue for the Power Solutions Group or PSG was $724 million, a decrease of 2% quarter over quarter and a decrease of 11% year over year. Revenue for the Analog and Mixed Signal Group or AMG was $556 million, a decrease of 5% quarter over quarter and 9% year over year. Revenue for the Intelligence sensing group or ISG, was $250 million, a 9% increase quarter over quarter driven largely by the industrial market and a decline of 17% over the same quarter last year. As we reposition the business for the long term, turning to gross margins in the fourth quarter, GAAP gross margin was 36% and non GAAP gross margin improved to 38.2%.

As we’re seeing the initial impact of our FABRIGHT actions executed in 2025 as planned manufacturing utilization is down quarter over quarter to 68% to align to seasonal revenue trends in the first half of 2026, we expect utilization to increase to the low 70% range in the first quarter and additional fab right actions to drive margin expansion through the year. GAAP operating expenses were $351 million, including $59 million in restructuring expenses. Non GAAP operating expenses declined 3% sequentially to $282 million at the lower end of our guidance range. GAAP operating margin for the quarter was 13.1% and non GAAP operating margin was 19.8%.

Our GAAP tax rate was 16.2% and non GAAP tax rate was 16%. Diluted GAAP earnings per share was 45% and non GAAP earnings per share was $0.64 above the midpoint of our guidance. GAAP and non GAAP diluted share count was 402 million shares. We repurchased $450 million of shares in the fourth quarter and as I indicated earlier, in 2025 we deployed approximately 100% of free cash flow to repurchase $1.4 billion of shares. Turning to the balance sheet, cash and short term Investments was approximately $2.5 billion with total liquidity of $4 billion, including $1.5 billion undrawn on a revolver.

Cash from operations was $555 million and free cash flow was 485 million 2025 free cash flow is a record at 24% of revenue and we expect to deliver strong free cash flow. In 2026. Capital expenditures were $69 million or 4.5% of revenue. Inventory decreased by $58 million to 192 days from 194 days in Q3. This includes 76 days of strategic inventory which is down from 82 days in Q3. As we continue to deplete this inventory over the next two years, excluding the strategic builds, our base inventory is healthy at 117 days. Distribution inventory increased slightly to 10.8 weeks from 10.5 in Q3 and is within our target range of 9 to 11 weeks.

Looking forward, let me provide the key elements of our non GAAP guidance for the first quarter of 2026. As a reminder, today’s press release contains a table detailing our GAAP and non GAAP guidance. We anticipate Q1 revenue will be in the range of 1.44 billion to $1.54 billion in line with normal seasonality at the midpoint. This marks the first quarter with expected year over year growth since the DownTurn started over 3 years ago. We expect to exit $50 million of non core revenue in the first quarter. Excluding these exits, our revenue would be above seasonal.

Our non GAAP gross margin is expected to be between 37.5 and 39.5% which includes share based compensation of $7 million. Our FabRight actions that I described earlier and other operational improvements are expected to contribute to gross margin expansion of 30 basis points at the midpoint in a quarter in which margins have historically declined with seasonality. Non GAAP operating expenses are expected to be between 285 and $300 million, which includes share based compensation of $29 million. We anticipate our non GAAP other income to be a net benefit of $7 million. With our interest income exceeding interest expense, we expect our non GAAP tax rate to be approximately 15% and our non GAAP diluted share count is expected to be approximately 397 million shares.

This results in non GAAP earnings per share in the range of 56 to $0.66. We expect capital expenditures in the range of 35 to $45 million. To close. With stabilization across automotive and industrial markets in our we are positioned to scale efficiently and convert that demand into profitable growth. With that, I’ll turn the call back over to Carmen to open it up for questions.

Question & Answers

Operator

Thank you so much. And as a reminder to ask a question, press star 11 on your telephone and wait for your name to be announced. To remove yourself, press Star one one again. One moment. While we compile the Q and A roster. Our first question comes from Ross Seymour with Deutsche Bank. Please proceed.

Ross Seymore — Analyst, Deutsche Bank

Hi guys. Thanks for asking a couple questions. I guess the first one is going to be a near term and the second will be a longer term question. On the near term question, what was going on in the other category? Everything else was better than expected, but other was pretty weak. And then I guess you sound better on your tone about everything to do with the cycle and secular, etc. But you’re kind of still at seasonal. So when do you think you could be above seasonal given the point of the cycle that we’re at right now?

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah, two things, Ross. One is if you exclude the exits, we are above seasonal. Right. So if you look at the reported numbers, they’re in line with seasonality, similar to what we’ve been saying for a couple quarters here. But if you exclude the exits, we are above seasonal. On your question about the other buckets, so we saw strength in AI data center. There’s clearly growth there. We have normal seasonality in Q4 in that other bucket that’s down. And then there are also about $40 million of exits that are in there. So that’s why that bucket was down sequentially.

Ross Seymore — Analyst, Deutsche Bank

Got it. Thanks for that. And I guess as my longer term question, perhaps for Hassan, you Talked about the AI data center side of things, the $250 million or slightly more than that. I know you don’t want to get anchored to a specific number for this year, next year, et cetera, but can you just talk a little bit about the TAM you think you can address in that when do you think it could be 10% of sales or something larger like that and how on differentiates to give you the confidence that you can gain that share?

Hassane El-Khoury — President and Chief Executive Officer & Director

Yeah. So obviously I will stick with. I’m not guiding specifically in 26 or the AI data center yet, but I’ll give you why the confidence in the continued growth at a. I would say at a pretty good rate because our growth rate accelerated from 24 to 25 and will continue. I described a little bit on how we tackle from a technology perspective from the wall to from the outside data center all the way to the board with that is how we differentiate. If you look at it, we’re the only company or one of the very few companies that are able to do the high voltage, think 800 volts with our 1200 volt devices all the way to the SPS type devices closer to the core.

You have to be able to do that conversion with the highest efficiency at every step of the conversion. But more importantly, architectures moving forward are collapsing the conversion tree, which means you have to be able to do high voltage and low voltage. We’re the only ones company that has vertical Gan, which is the highest power density at the highest voltage. Again a competitive advantage. We will flex to continue to gain share with the high voltage power supply makers. And closer to the xpu, we’re in with the standard companies you talk about not only with the standard GPUs but also the non standard GPUs or ASICs and so on.

So we’re approaching it with a broad portfolio. Number one and more importantly we’re targeting where the market is going to be in a few years, which is the high voltage rail, which is exactly where we play very well in automotive already. Those two are angles we are flexing. They’re the angles that already delivered the $250 million in 25 from almost nothing and that will continue to grow with the proliferation of the roadmap. And add to that of course the Vcore which we’ve acquired in 2025. That will add cumulatively to the power devices we have.

Ross Seymore — Analyst, Deutsche Bank

Thank you.

Operator

Thank you. One moment for our next question. It comes from Vivek Aria with Bank of America securities. Please proceed.

Vivek Arya

Thanks for taking my question. You mentioned I think 40 million of non core exit in Q4, I think 50 million in Q1. Is this the kind of quarterly run rate that we should expect through 26? And Hasan, if we set kind of these things on the side, then can on get to Your long term 10 12% Top line growth target conceptually for this year if the macro environment is getting better?

Hassane El-Khoury — President and Chief Executive Officer & Director

Yes, I’ll Dan. So first off on the exits, you know we talked about the 50 million, if you think about it for the whole year at 300, you have the couple quarters kind of Q2 and Q3 would be higher than that.

And then you can apply kind of the seasonality where we’ll be exiting. But it’s not flat at 50 because it’s a 300 total. So that’s point number one. Point number two on the growth. So if I take into account the exits for Q1 or even for the year, Vivek, you can think about our core business has been growing above market even in the downturn almost. This is the stuff we’ve been investing in and that’s delivering already over or multiple of market growth. That’s why? In Saad’s prepared remarks, he clearly articulated that if you account for the 50 million exit in the first quarter, we’re actually above seasonality as a baseline.

That’s what products that we’ve been introducing over the last few years are starting to contribute on a base. So to answer your question, longer term we expect 27 to resume that over market growth. If you think about it that way, now that we net out the exits, does that make sense?

Vivek Arya

Yes. Thank you for that, Hassan. And then maybe Tad, on gross margins, I think you gave new number for depreciation. I was hoping you could just give us kind of a walk of for gross margin. So let’s say conceptually if you do go through these exits and you are in kind of the run rate of your long term model, how should we think about your fab utilization and then gross margin kind of broad bracket this year.

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah. So for Q1 we expect utilization to be in that low 70% range. Depending on what this market does and what this potential recovery looks like, we’ll match utilization to whatever the market does. Sitting here today, I think we’re going to be for Q2 and beyond, we’re going to be running kind of mid-70s plus or minus. If there’s a sharper recovery, we will match that very quickly and that will all fall through to gross margin. As I said in my prepared remarks, we believe there’s margin expansion through the year. We have the Fabright activities that will start to hit the company later in the year.

And as utilization goes up, that will impact later in the year as well. So sitting here today, we feel good about the gross margin progression from this point.

Vivek Arya

Thank you, Pat.

Operator

Thank you. Our next question is from Alex Fernandez with Jefferies. Please proceed.

Blayne Curtis

Sorry, it’s Blaine Curtis. Thanks for taking the question. I just want to ask on the AI data center, obviously a huge focus. You did throw out a kind of target for the year that you exceeded. I was just curious thoughts about growth in that segment for 26.

Hassane El-Khoury — President and Chief Executive Officer & Director

Yeah. So Lane, as I mentioned, we will see growth. Actually we’re starting off the year with a better growth than we did starting off last year. So I’m very bullish about that segment, but I’m not giving a guidance on that segment specifically, but it will be a driver of our baseline revenue net of the exits.

Thad Trent — Executive Vice President and Chief Financial Officer

We do expect that our AI data center revenue in Q1 will grow high teens percentage wise to give you an indication of our trajectory here.

Blayne Curtis

Awesome, thanks. And then I wanted to just ask on the exits of the business, I Mean, assuming these are lower margin. But I also, I was just curious, the impacts to utilization, can you kind of net that out for us like you’re walking away from 90 million a quarter over two quarters. Is that a positive or a negative for gross margin?

Thad Trent — Executive Vice President and Chief Financial Officer

It’s neutral today. So the margin on that business today is near the corporate average. The reason we’re exiting is because we’re seeing margin pressure and pricing pressure on that business that’s been volatile historically and a part of the business why we called it our non core business that we would exit over time. So it really doesn’t have an impact on gross margin. We’ve got the capacity, it’s not going to be a headwind to utilization. So you can see that even with the net of these exits. What I answered in the previous question is that our utilization, we expect to go up throughout the year.

Blayne Curtis

Thanks, Seth.

Operator

Thank you. Our next question comes from the line of Joshua Bocalter with TD Cowan. Please proceed.

Joshua Buchalter — Analyst, TD Cowan

Hey guys, thanks for taking my question. Maybe can you quickly walk through the puts and takes on gross margins into Q1? I mean, utilization rates are coming up, but margins are down sequentially. I know there’s a timing element and it doesn’t immediately match utilization rates. But any other puts and takes on pricing or other factors or mix we should be considering when we’re thinking about gross margins. Thank you.

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah. So Josh, the key element here is that the Q1 midpoint of our Q1 guidance is up 30 basis points on gross margin. So if you go back to our utilization in Q3, which was 68%, if you remember, we. I’m sorry, we took it up to 74. We’re down. Q4 was 68. So we took it up to improve the mass market. So we’ve got a number of things. Typically Q1 is seasonally down and gross margins are down. The fact that we’re actually expanding gross margins, 30 basis points shows you that our Fabright initiatives are taking cost out or offsetting the headwind. So it’s actually up quarter and quarter.

Joshua Buchalter — Analyst, TD Cowan

Okay, that’s a minor stake. Sorry about that. And could you maybe provide outlook by end market for Q1 in particular? I was hoping you could comment on the auto market. You know, it sounds like the inventory restock. Sorry, the inventory correction is complete. You know, should we expect autos to grow sequentially in the March quarter? Thank you.

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah, I’ll give it to you by end market. So auto is roughly flat. As you remember, the Chinese New Year has a little bit of a head headwind on Auto. So when we think about sequential, it’s roughly flat industrial. We’re planning on being down low teens and that’s primarily due to seasonality and energy infrastructure. Again with the Chinese New Year and some lumpiness in the factory automation. Our traditional industrial will be seasonal within that bucket and then our other bucket is up low single digits and that’s driven by the AI data center that I referred to up high single digits and offset by seasonal declines as well as our non core exits.

Hassane El-Khoury — President and Chief Executive Officer & Director

The AI data center is up high teens. Sorry.

Joshua Buchalter — Analyst, TD Cowan

Got it. Thank you both.

Operator

Thank you. Our next question comes from the line of Quinn Bolton with Needham and company. Please proceed.

Quinn Bolton — Analyst, Needham And Company

Just a clarification on the first quarter gross margin. You saw the uptick in utilization rates in the third quarter and you said it usually takes a quarter or two to flow through. So is the first quarter really the benefit you saw in that utilization in Q3 or is it more product mix and other factors in Q1?

Thad Trent — Executive Vice President and Chief Financial Officer

It’s a combination of both. I mean you got mix but you got a combination of the utilization impact as well. Now Q4 step down and then you have our cost benefits as well. With the Fabright activities,

Quinn Bolton — Analyst, Needham And Company

with the Q4. Step down in utilization to 68. Would that hit you more in Q1 or would it hit you more in Q2?

Thad Trent — Executive Vice President and Chief Financial Officer

Just I know

Quinn Bolton — Analyst, Needham And Company

utilization from here is trending in the right direction. Just trying to get you know, is it a 3, 3 month lag or a 6 month lag usually on that utilization effect?

Thad Trent — Executive Vice President and Chief Financial Officer

No, it’s about two quarters. But you know, sitting here again, I think we’re going to have the kick in of that depreciation that I mentioned and I don’t see that as a headwind in Q2 of next year, this year.

Hassane El-Khoury — President and Chief Executive Officer & Director

So typically basically to drive it for you in Q4, the utilization going down would have hit us in Q2. But we don’t sitting here today we don’t see that because we’re offsetting it with cost actions and the fab. Right. That will offset any utilization. So that’s back to the strength of the gross margin based on the work we’ve been doing.

Quinn Bolton — Analyst, Needham And Company

Got it. And then Hassan, in your prepared comment, I think you said you’re going to be introducing over 30 GAN based solutions this year wondering if you could just give us do most of those target sort of mid or low voltage applications in the data center. Does it target products across all three of the target end markets? Just any more sort of color on where you’re going to be targeting some of those Gan solutions that you’re introducing this year.

Hassane El-Khoury — President and Chief Executive Officer & Director

Yeah, it’s basically across the voltage range that I mentioned, 40 to 1200 volts. So that includes obviously the lower voltage that target the data center, call it closer to the XPU, all the way to high voltage, 1200 volts that go into, you know, the higher voltage and an automotive and industrial, so broader range of voltages targeting a lot of our end markets. You know, I mentioned one of the things we’re working on, for example with vertical gan, with a Traction, Vertical Gan based next generation Traction with GM as an example.

Quinn Bolton — Analyst, Needham And Company

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Joe Quattrocci with Wells Fargo. Please proceed.

Joe Quatrochi — Analyst, Wells Fargo

Yeah, thanks for taking the question. Maybe one on the data center side. You know, I saw that you had an updated slide in your deck relative to last quarter. And I think now your opportunity you’re talking about, you know, what that looks like per rack in 2030, which is a pretty significant increase versus the prior deck. I think you’re at like $105,000 per rack versus like 50k for 2027. Just curious, like what, what’s driving that and the significant growth for rack from 27 to 2030.

Hassane El-Khoury — President and Chief Executive Officer & Director

Yeah, so as new generation architectures start to firm up, we are introducing a lot more products to address it. So our overlap of products availability that we’re making and investing in or have invested in versus the opportunity of content in the rack has increased. And this is kind of the list of new products I’ve been talking about. Whether it’s Silicon Carbide, JFET or the vertical Gan, or even the 5×5 or SPS point of load, we have been heavily investing over the last year or so in order to capitalize on the content that the AI opportunity provides.

So that’s exactly the reason for the increase is more products mapping onto more content that we can address with our portfolio.

Joe Quatrochi — Analyst, Wells Fargo

Thanks. And then as a follow up, you talked about strong free cash flow again in 2026. Just curious if there’s any targets that we should be thinking about for this year and then how you’re thinking about returning or what percent of that returning to shareholders?

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah, our stated target is 25 to 30%. You know, in 2025 we delivered 24. I talked about expanding the free cash flow margin. And so I think we’re going to be in that range of within our target. Our plan, as you can see with our announced repurchase authorization of $6 billion, is to continue to return 100% of our free Cash flow to shareholders.

Joe Quatrochi — Analyst, Wells Fargo

Thank you.

Operator

Thank you. Our next question comes from the line of Gary Mobley with Loop Capital. Please proceed.

Gary Mobley — Analyst, Loop Capital

Hey guys, thanks for taking my questions. You’re clearly signaling better revenue visibility, albeit met with some seasonal headwind and some business exits in the first quarter. But maybe if you can share with us a few more specifics on the Forward looking revenue KPIs like beginning a quarter, starting backlog or any sort of customer expedites or just any sort of revenue visibility change that you’ve seen in just the last three months.

Hassane El-Khoury — President and Chief Executive Officer & Director

Yeah, yeah. This is so like you said, visibility or kind of the outlook is better sitting here than we were 90 days ago. And this is across all the KPI’s book to Bill is trending up.

We are walking into the quarter with less turns needed than the prior quarter expedites. We’re seeing more expedites than we did 90 days ago. So all of the metrics that you mentioned are exactly what is giving us that confidence in the outlook or improved visibility? And the outlook, what we’re talking about for example, is we’re not seeing the replenishment yet, but this is strong signals for stabilization in the market. And you’ve seen going back to seasonality inclusive of the exit highlights the strength of our base business, which is what we’ve been investing in.

Gary Mobley — Analyst, Loop Capital

Thanks for that. In regarding your, I guess, refocus on GAN products, forgive me if that’s not the right term but you know, in vertical gan you’ve got, I guess your own manufacturing, you know, supply chain. In lateral gan, it sounds like you forged, you know, two manufacturing relationships with Innoscience and Global Foundries. And I assume that’s the geographic specificity that you were, you’re hinting to in your prepared remarks. But you know, the question is, do you feel like you’ve, you know, invested enough there? Do you feel like you’ve built out, you know, rebuilt the product portfolio to the degree you hope, you know, across the different voltage, you know, spectrum and whatnot.

Hassane El-Khoury — President and Chief Executive Officer & Director

Yeah, I think, I think if you look at it from a voltage range and capability having 40 volts through 1200 volt native, and I say native is it’s not about stacking two lateral GaN devices to get to the high voltage. This is a single 1200 volt gan on gan high voltage device which gives you the power density. I say yes. What maybe wasn’t clear here, and I did mention it in my prepared remarks, is the GAN with drivers. So not just the GAN devices and those drivers are, you can think about them as covered by trio, which we already have invested in and is already in house.

So combined devices and the smart drivers that we do on Trio, that gives us the complete portfolio that we need to tackle Gan, whether it’s in the AI data center, automotive or the Humanoids.

Gary Mobley — Analyst, Loop Capital

Thanks Hassan.

Operator

Thank you. Our next question comes from the line of Christopher Roland with Susquehanna. Please proceed.

Christopher Rolland — Analyst, Susquehanna

Hey guys, thanks for the question. Mine is on silicon carbide, both EV and AI. I guess first of all on ev, if you could give us an update, particularly geographically, how that business is progressing and what to look forward to in the future. And then we’re also on the AI side starting to hear about potentially using silicon carbide for substrates. This might require a movement to 300 millimeter for example. Are you guys, is this an opportunity that you guys might address and is there an ability to convert your furnaces to 300 millimeter?

Hassane El-Khoury — President and Chief Executive Officer & Director

So let me first cover on the silicon carbide. In automotive we still see the silicon carbide opportunity, although you know, the Xevs tapered down. From a growth perspective we’re still a major share in China, which is all silicon carbide because they all are on the 800 volt. We are still gaining share in North America and we continue to proliferate in European OEMs. And those obviously are still trending up from a unit perspective. So overall the work is done, the design ins are done and now we’re working on proliferation within the OEMs and within the geographies.

I spoke a lot about silicon carbide jfetch, which is in the AI data center. We’ve seen tremendous design and growth. Part of that 250 million in AI data center is driven by silicon carbide JFET. So that continues to go there. As far as the 300 millimeter, we are not going to be converting furnaces to 300 I think from internal silicon carbide manufacturing. We’re happy with our footprint. Remember this was more on supply and regional resiliency than anything else. We will continue to focus on that from a supply, from a resiliency, but you’re not going to see a capex cycle going to the furnaces or substrate manufacturing.

Christopher Rolland — Analyst, Susquehanna

Perfect. And as a second question, one of your competitors is buying Silicon Labs and the rationale behind it was to fill out other parts from their catalog on their customers boards, but in addition to fill their fabs. And from either of these perspectives, does this compel potentially an acquisition on your part or push you even more towards, towards doing a Deal or is the environment just from a valuation perspective just a little too elevated right now?

Hassane El-Khoury — President and Chief Executive Officer & Director

Yeah. So I’ll give you kind of our view. So one, you’re not going to hear me talk about doing MA to fill a fab. We’re going to do for us, M and A is more strategically driven and portfolio driven and you’ve seen us do that over the last few years. Very targeted M and A regardless of size, but to fit a purpose of either portfolio completion or acceleration of something we were doing. And we’ll continue to go down that path from a compute perspective. I don’t know if I’ve talked about it on these calls, but our trail platform already provides for a embedded compute capability.

So our focus for now is really embedding compute where it makes sense to control the output, which is at the power stages or at the analog mix signal or at the DSP for hearing aids and so on. So we have microcontrollers that are fit for purpose already going down to 22nm, all the way to 65nm. So where we see a gap, we are targeting that gap organically and we already are in the market with that. As a general comment, we’re always looking for value and we’re always looking at complementing and being a service, full service provider for our customers.

So that’s strategic conversation. But it’s not to fill a fab or to bridge an immediate need. It will be more for a margin expansion or a market expansion than anything else.

Christopher Rolland — Analyst, Susquehanna

Thanks, Hassan.

Operator

Thank you. Our next question comes from the line of Vijay Rakesh with Mizuho. Please proceed.

Hassane El-Khoury — President and Chief Executive Officer & Director

Vijay, are you there?

Operator

Sir, can I move to the next question?

Hassane El-Khoury — President and Chief Executive Officer & Director

Yes, please.

Operator

All right.

Vijay Rakesh — Analyst, Mizuho

Oh, sorry, I was on mute just on the Hasan. Just on the fabright and the EFK utilization improvement. I should look out to 27. Do you expect gross margins to get back to the low 40s? Looking at the margin accretion from EFK and Fabright.

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah, look, in the short term and even the long term, I mean, gross margin is going to be driven by utilization. So as I was saying earlier, we can match our utilization to whatever this recovery looks like. We’ve got lean inventory on our balance sheet. Lean inventory are right in our sweet spot on the distribution channel. We don’t need to wait to burn through inventory before we can adjust utilization. And we can match that very closely. You know, if you think about the progression. Yeah. Getting to something with a four handle is. It is, you know, within sight. Assuming that the market continues to recover.

Vijay Rakesh — Analyst, Mizuho

Got it and then on the AI data center side, I’m sorry to keep harping on it, but as you look out, given how big that market could be, do you expect that to get to like a 10, 15% of revenue run rate given some of the peers seem to be targeting somewhere like that? Thanks.

Hassane El-Khoury — President and Chief Executive Officer & Director

Yeah, I mean look, it’s a matter of the when, not the if because we have the products, the market is there. The question is how quickly and do we get in there. Remember we started that journey last year with new products. So you give a design cycle and proliferation of products and I see that happening again. It’s a question of when.

Vijay Rakesh — Analyst, Mizuho

Thank you.

Operator

Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed.

Joseph Moore

Great, thank you. I saw you reiterated the long term targets, the 53% gross margin, 40% operating margin and I know it’s been clear for a while that was going to take a little longer than your original thoughts. But can you talk to those targets and is that an achievable number? And it seems like utilization gets you partway there. Can you remind us what it takes to get to those levels over time?

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah, let me walk through the bridge and kind of relates to Vijay’s question there as well. So you know, as I said in the prepared remarks, there’s about 700 basis points of headwind from under utilization just in the Q4 margin. So if you take our utilization from, you know, the 70% range up into the to the low 90s, you’re going to get 700 basis points. So back to the market recovery, matching that and so that’s just a matter of time to be able to get that. In addition, we believe there’s another 200 basis points of Fabright activities that we can continue to execute to.

So we’re not done there. That’s driving efficiencies in our manufacturing footprint. And you can tell we’ve been working on that for several years and now it’s starting to pay off. Another thing is we’ve got the fab divestitures from a couple years ago. It was $160 million of fixed costs. When we start manufacturing that inside. So that’s roughly another 200 basis points. And then you know, with the new products that are coming out that are all at favorable gross margins that we’re talking about here, you know, you’ve got another 200 basis points plus that we can get out of that.

So you start adding that all up, you’re getting to that, you know, pretty close to that 53% gross margin target and that’s why we’re, we’re holding that target out there.

Joseph Moore

That’s helpful. Thank you. And then I’ve asked you a couple times over the course of this quarter, but it seems like there’s a number of indications that the automotive inventory is kind of lean. You had Nextperia, kind of caused people a lot of trouble a few months ago now DDR4 and I know you’re not in those direct product areas, but does that catalyze at some point a restocking in the automotive space and maybe. Why aren’t we seeing that yet?

Hassane El-Khoury — President and Chief Executive Officer & Director

Well, I think I gave the answer. You’d think it would, but it’s not. Because I think a lot of the automotive market, especially on the tier one layer, they’re running on thin margins and they can’t afford the capital. Right or wrong, it’s irrelevant. But neither me and I think most of my peers that are exposed to auto have talked about the same thing that we’re not seeing the restocking, whatever the reason may be, which I think is setting automotive to a risky ramp when the demand does pick up.

Joseph Moore

Thank you.

Operator

Thank you. Our next question comes from the line of Chris Casso with Wolf Research.

Chris Caso — Analyst, Susquehanna

Yes, thank you. The first question I wanted to ask. A bit more about GAN and specifically the manufacturing strategy. I think what you said there is that the trio products you would do in house. But what about the GAN switch? Switches, what’s the manufacturing strategy there? And where do you think you are from a competitive standpoint in that technology?

Hassane El-Khoury — President and Chief Executive Officer & Director

Yeah. So if I understood correct. So from the Gann switches this is what We’re. We have two sources. We have an engagement or a partnership with Innoscience and a partnership with GlobalFoundries. So we’ll be doing the switches or the switching element with those partners and then combining it with call it the control and drive on the trail side of it combined in a smart switch. So the customer only sees a smart switch as far as the market from a on semi product. So we’ll be going to market with 100% on semi product with a call it a foundry model, bringing the switches from third party global and Innoscience. So that’s our go to market today. And with that we have a full coverage of what the GAN market needs and what customers are expecting.

Chris Caso — Analyst, Susquehanna

Understood, thanks. Just a follow up question, you know, just so you can perhaps level set us as to what you consider to. Be normal seasonality for the June quarter. And you’ve already mentioned some of the Exits in the June quarter, which is a little higher than the March quarter. Is there anything else that we should consider looking into the June quarter, understanding that you’re not providing guidance?

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah. The June quarter is typically up 3 to 4%. Naturally. I believe the exits are probably going to be somewhere around $100 million. So doubling over the Q1, $50 million. But I think Q2 and Q3, you’re probably looking at 100 million plus exits for both quarters. But to answer your question, seasonality is up 3 to 4% in Q2.

Chris Caso — Analyst, Susquehanna

Thank you.

Operator

Thank you. Our next question comes from Harsh Kumar with Piper Sandler.

Harsh Kumar

Yeah, hey, I wanted to ask about the relative velocity of your two key end markets. Hasan, as you look at automotive and industrial in the near term it looks like industrial is rising faster. But I would think with the content and just the growth in the markets, is it not fair for me to assume that maybe 12 months out that it flips over and automotive is a bigger driver of growth? And then I’ll ask my second one as well. Maybe for right now, for Thad is the 700 points of underutilization. I wanted to just understand that a little bit better.

You’ve had a lot of exits, divests, your, you’re writing off a bunch of products, 300 million this year. So what is the right level of revenue for me to think about getting rid of all of that $700 million. I’m sorry, 700bps of underutilization on a quarterly revenue run rate basis.

Hassane El-Khoury — President and Chief Executive Officer & Director

Yeah. So harsh. Let me give you first, your assumption is correct if you think about it our and let me give you numbers to illustrate and support it. So if you look at our content growth, we’ve always said we have content growth. So we’re not as tied to the SAR as we are to content. From an automotive growth perspective. We have added more products to that Lineup in automotive like 10 based T1s, ethernet power, smart FETs and so on. So that will continue to expand our content. Over the last five years since we started this journey, our Automotive actually grew 70% five years.

That’s pretty much on a flat SAR. So that gives you kind of our target of the high single digit growth on top of sar. So what you can think about it in the long term is we will resume that growth in automotive and we are sticking with the model and the outlook we’ve given in our last analyst day, which is high single digit growth in auto driven by content above the sar. And we’ve delivered that over the last five years of course there’s lumpiness given the cycle, but we’ve delivered on that. So you would expect that from on semi with the additional content moving forward as well over a multi year period.

Thad Trent — Executive Vice President and Chief Financial Officer

Yeah, and harsh on the utilization and the charges for underutilization 700 basis points. So to as that dissipates we’ve got to get up into the low 90 percentage utilization in order to get there. If you take a consistent mix of where we are today, it’s roughly about 25% higher in revenue to get to a fully utilized based on a consistent mix. So obviously as new products ramp that will help us as well.

Harsh Kumar

Thank you guys.

Operator

Thank you. And this will conclude the Q and A session for today. I will pass it back to Hassan El Khoury, President and CEO for closing comments.

Hassane El-Khoury — President and Chief Executive Officer & Director

All right, thank you again for joining us today. And I’d also like to thank our employees around the world whose focus and commitment drive these results. Their innovation and execution are the reasons we continue to strengthen our position in intelligent power and sensing and deliver for our customers in the most important market transitions. As always, we appreciate your support and we look forward to our next update.

Operator

Concludes our conference. Thank you for participating. You may now disconnect.