onsemi Boosts Utilization as AI Data Center Revenue Set to More Than Double

onsemi is increasing factory utilization to meet stronger demand in AI data center markets while maintaining its longer-term focus on automotive and industrial customers. The company’s decision to prioritize certain data center demand was a temporary operating adjustment rather than a strategic shift away from automotive and industrial markets. Manufacturing capacity remains flexible through most of the production process, with 1,200-volt silicon carbide products usable in automotive 800-volt systems or AI data center applications. The company can make allocation decisions until products are roughly two weeks from completion.

onsemi has capacity available and does not need a new capital-expenditure cycle to address current demand. The company raised utilization to 83%, with full utilization generally in the 92% to 93% range. Capital spending remains planned at a mid-single-digit percentage level. Utilization is expected to be the primary driver of gross-margin improvement over the next six to 12 months. The company exited the prior year with utilization at 68% before increasing it to 83% last quarter. Each percentage point of utilization improvement contributes roughly 25 to 30 basis points of gross-margin improvement two quarters later. Margins improved in the second quarter and are guided for a significant step-up in the third quarter, with further improvement expected in the fourth quarter and into the following year.

Longer-term margin factors include lower underutilization charges as factory utilization rises, about 200 basis points of improvement from the company’s FabRight initiatives, benefits from manufacturing-site divestitures, potentially favorable product mix, and the end of bridge-inventory consumption from prior fab divestitures. The company recorded 650 basis points of underutilization charges in the second quarter. Price increases initiated April 1 and a second round now underway should also provide a near-term tailwind, though the full effect will take several quarters to reach the profit-and-loss statement.

Automotive restocking has not been consistent, and the company has yet to see a broad replenishment cycle among customers. Industry vehicle-production rates have been flat to sl...