ON Semiconductor Corporation (ON.US) Q3 Earnings Call: CEO Denies Downplaying Automotive Business, Expects AI Data Center Revenue to Double Again Next Year

**ON Semiconductor Corporation (ON.US) Q3 2026 Earnings Call** On Monday, November 2, after the U.S. market close, ON Semiconductor reported third-quarter 2026 results. Revenue for the quarter was US$1.722 billion, up 11% year over year and 7% sequentially, US$22 million above the midpoint of company guidance and above analysts' expectations of about US$1.71 billion; non-GAAP gross margin was 41.2%, up 190 basis points sequentially and the fifth consecutive quarter of expansion; non-GAAP operating margin was 23.2%; non-GAAP diluted earnings per share were US$0.90, up 43% year over year and above expectations of US$0.88, while GAAP diluted earnings per share were US$0.79. The company guided fourth-quarter revenue of US$1.715 billion to US$1.815 billion and non-GAAP earnings per share of US$0.95 to US$1.07, with midpoints of US$1.765 billion and US$1.01, both above analysts' expectations of US$1.74 billion and US$0.96; at the midpoint, revenue would grow 2.5% sequentially, an above-seasonal increase. The stock failed to get a lift after the results: in Monday's regular session the shares closed down 2.18% at US$70.11 and fell a further roughly 5% after hours, trading at US$66.56 at 16:42 Eastern Time. The most closely watched issue on this call was not the size of the revenue and EPS beats but the contraction in the automotive business. Automotive revenue for the quarter was US$777 million, down 1% both sequentially and year over year; CFO Thad Trent further guided in the outlook for fourth-quarter automotive revenue to fall by a "high-single-digit percentage," while total revenue is expected to grow 2.5% sequentially over the same period. The company attributed this to supply reallocationwith some technology nodes still supply-constrained, in the third and fourth quarters it "intentionally allocated supply to markets with stronger end demand, such as AI data centers and industrial," while automotive customers "are being supported on all end-demand deliveries, but not on orders for inventory replenishment." Five of the nine analysts who asked questions pressed on this trade-off, with the core concerns being whether long-term share would be damaged and where the incremental supply needed to resume growth next year would come from. El-Khoury explicitly denied this: "We are not de-emphasizing the automotive market," "this is short-term and supply-driven, not strategy-driven," "this precisely shows there is no share lossit is purely an inventory replenishment issue, not an end-demand issue." He said the company would resume shipments in the first quarter and that in 2027 the automotive business would return to its long-term growth target of "high-single-digit growth above SAAR." **Three major business segments: PSG up 21% year over year** By business unit, the Power Solutions Group (PSG) had revenue of US$890 million, up 7% sequentially and 21% year over year, accounting for about 52% of total revenue; the Analog & Mixed-Signal Group (AMG) had revenue of US$597 million, up 9% sequentially and 2% year over year; and the Intelligent Sensing Group (ISG) had revenue of US$235 million, up 3% sequentially and 2% year over year. PSG's year-over-year growth was significantly higher than that of the other two segments, consistent with the concentrated release of demand from AI data centers and industrial power. **AI data centers: about US$620 million for the full year, doubling again next year on a higher base** Starting this quarter, the company broke out AI data centers from the "other" end markets and disclosed it separately as a fourth end market. Revenue for the segment in the quarter was US$180 million, up 39% sequentially and 175% year over year, accounting for about 10% of total revenue. Management expects mid-teens percentage sequential growth in the fourth quarter, about US$620 million for the full year 2026, up 140% year over year; for 2027 it still expects to double again on 2026's higher base. El-Khoury said that in the third quarter the company began volume shipments to several flagship platforms, including Googlesupplying both silicon carbide and silicon MOSFETs for power supply units (PSUs) and for 54V-to-12V applications. He stressed that the company's revenue covers the complete power chain "from the power supply unit to the low-voltage smart power stage next to the processor," and that the migration to 800V architectures would bring the next round of content opportunity: "Our low-voltage to high-voltage power portfolio spans silicon, silicon carbide and vertical GaN, which allows us to address the challenge of converting directly from 800V to 54V, 12V and 6V within the AI rack." He also said that at last month's OCP Summit the company demonstrated an 800V-to-6V solution based on vertical GaN, together with gate drivers and MOSFETs, achieving leading efficiency and power density in the most challenging conversion stage of the AI rack. **Industrial and the "AI halo": double-digit growth continues in the fourth quarter** Industrial revenue was US$467 million, up 10% sequentially and 9% year over year, and the company expects low-double-digit percentage sequential growth in the fourth quarter. El-Khoury attributed the main reason for the beat to the so-called "AI halo"that is, demand from the grid, energy storage and energy infrastructure outside AI data centers: "Everything outside the AI data center walls is very strong and coming in better than we expected"; in addition, improving PMI is driving broader industrial demand. The CFO added that broad industrial accounts for about 40% of the total industrial base and is also strengthening. Other incremental drivers in the industrial segment came from Siasun Robot&Automation and physical AI: the company said it has partnered with more than ten leading drone manufacturers, with increased shipments of 2-megapixel and 8-megapixel Hyperlux image sensors; in humanoid Siasun Robot&Automation, it has achieved new design wins in connectivity and sensing with several leading U.S. manufacturers; its indirect time-of-flight (iToF) technology can improve depth resolution to 1 millimeter, up to 10 times better than competitors. On the energy side, the company expanded orders for hybrid EliteSiC and IGBT modules, with customers including Sungrow Power Supply. **Acquisition of Ferric; 2030 AI data center target raised to more than US$3 billion** The company also announced the same day the acquisition of Ferric for US$600 million in cash plus up to US$175 million in contingent consideration tied to revenue milestones, with closing expected in the fourth quarter. Ferric focuses on integrated voltage regulators (IVRs), integrating the controller, power switches, capacitors and magnetics into a single package placed close to the GPU. Management said the acquisition would raise the 2030 AI data center revenue target by US$500 million, or 20%, to more than US$3 billion. Asked whether the entire increase came from the acquisition, El-Khoury replied: "It is related to this acquisition." He stressed that this is a "multi-year opportunity well beyond 2030," expected to be accretive to growth and gross margin targets and to EPS at scale, but with no material near-term financial impact. He also said Ferric has already engaged with all hyperscalers at the design and platform architecture level, "with electrical transient response better than any solution on the market and mechanical Z-height significantly better than the current industry level of about 2.5 millimeters," while ON Semiconductor brings scale, manufacturability and customer reach. **Gross margin expands for a fifth consecutive quarter, pointing to a 53% long-term target** Non-GAAP gross margin was 41.2%, up 190 basis points sequentially, with capacity utilization flat at 83%. Trent explained that the gross margin improvement in the quarter reflected the lagged effect of the 77% utilization level two quarters earlier, and that the formula "each 1 percentage point of utilization improvement corresponds to 25 to 30 basis points of gross margin improvement" still holds and also applies in 2027. He laid out the bridge to the 53% long-term gross margin target: about 450 basis points of utilization improvement (corresponding to a rise from 77% to 92%93%), 225 basis points from Fab Right (production line optimization), 400 basis points from new product mix and portfolio improvement, and some tailwind from price adjustments. Fourth-quarter non-GAAP gross margin guidance is 41.5% to 43.5%, with the midpoint implying a further 130 basis points of sequential expansion. Inventory rose US$22 million sequentially, but days fell 6 days to 186 days, of which strategic inventory fell 7 days; channel inventory fell from 10.1 weeks to 9.9 weeks. **Capital allocation: deleveraging prioritized; buybacks restricted by transaction constraints** Operating cash flow for the quarter was US$516 million, up 23% year over year; free cash flow was US$489 million, up 31% year over year and 28% of revenue; capital expenditure was US$28 million, or 1.6% of revenue, with full-year capital expenditure expected at about 2% of revenue. Cash and short-term investments at quarter-end were about US$4.4 billion, with total liquidity of US$5.9 billion (including US$1.5 billion of undrawn revolving credit). Third-quarter buybacks were only US$20 million, with Trent saying repurchase activity was restricted by the trading window related to the Synaptics transaction and the renegotiation of its terms. On uses of cash, Trent said Ferric would be paid for with cash on the balance sheet; after the Synaptics transaction (revised to about US$5.7 billion all-cash, or US$123 per share, replacing the original roughly US$7 billion stock-based proposal) closes, the top priority would be deleveraging, "clearly the highest priority after investing in the business; we will buy back opportunistically, but the intent is to deleverage quickly." He also said capital expenditure intensity would return to about 5% in 2027, consistent with the long-term model, and that "on the current outlook, or even with some upside, we will not hit capacity limits in 2027." **Fourth-quarter guidance: automotive declines, industrial and data centers pick up the slack** The company expects fourth-quarter revenue to grow 2.5% sequentially (at the midpoint), with automotive revenue down a high-single-digit percentage, reflecting continued supply reallocation and the timing and pace of customer deliveries, and said it would return to normal levels in the first quarter as supply comes online; industrial up low-double-digit; AI data centers up mid-teens; and "other" end markets up high-teens, mainly due to seasonality in the wireless business and the ramp of a large customer program. That "other" program is manufactured by an external foundry and therefore does not consume internal capacity. Management also said that based on current visibility, momentum would continue into 2027, with revenue continuing to grow and gross margin continuing to expand. The following are the details of ON Semiconductor's third-quarter earnings call. **Conference: ON Semiconductor (onsemi) Q3 2026 Earnings Call** **Time: November 2, 2026, 5:00 p.m. Eastern Time** **Management participants** Parag Agarwal, Vice President, Corporate Development and Investor Relations Hassane El-Khoury, President and Chief Executive Officer Thad Trent, Executive Vice President and Chief Financial Officer **Analysts asking questions** Vivek Arya, BofA Securities Research Blayne Curtis, Jefferies Research Joseph Quatrochi, Wells Fargo Research Thomas O'Malley, Barclays Research Gaurav Saini, StoneX (on behalf of Gary Mobley) Christopher Caso, Wolfe Research James Schneider, Goldman Sachs Research Tyler Bomba, Robert W. Baird Research (on behalf of Tristan Gerra) Tore Svanberg, Stifel Research **Operator:** Good day, everyone, and thank you for your patience. Welcome to ON Semiconductor's third-quarter 2026 earnings call. (Operator instructions) Please note that this conference is being recorded. I will now turn the call over to today's speaker, Parag Agarwal, Vice President, Corporate Development and Investor Relations. Please go ahead. **I. Management remarks** **Parag Agarwal (Vice President, Corporate Development and Investor Relations):** Thank you, Daniel. Good afternoon, and thank you for joining ON Semiconductor's third-quarter earnings call. With me today are Hassane El-Khoury, President and Chief Executive Officer, and Thad Trent, Chief Financial Officer. This call is being webcast live on the Investor Relations section of the company's website at www.onsemi.com. A replay of the webcast and the third-quarter earnings release will be available on the company's website about one hour after the call, and the recording will be accessible for about 30 days afterward. Additional information has been posted to the Investor Relations section of the company's website. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures, and a discussion of certain limitations of using non-GAAP measures, are included in our earnings release, which has been separately posted to the Investor Relations section of the company's website. During this call, we will make projections or other forward-looking statements regarding future events or the company's future financial performance. We caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from the projections. Important factors that could affect our business, including factors that could cause actual results to differ materially from forward-looking statements, are described in the company's most recent Form 10-K, Form 10-Q and other filings with the U.S. Securities and Exchange Commission, as well as in the third-quarter earnings release. Our estimates or other forward-looking statements may change, and except as required by law, the company assumes no obligation to update forward-looking statements to reflect actual results, changes in assumptions or other events. I will now turn the call over to Hassane. Hassane? **Hassane El-Khoury (President and Chief Executive Officer):** Thank you, Parag, and thank you all for joining us this afternoon. Our third-quarter results reflect the continued strength of the business and the momentum we are building in our strategic growth marketsgrowth above seasonal trends, AI data centers continuing to accelerate, and improving industrial demand. We see particularly strong demand where power density is becoming a key differentiator: from AI data centers and the grid infrastructure that supports them to energy storage and next-generation vehicle architectures. These are the strategic markets where we have concentrated our investment, and that strategy is now translating into revenue growth, gross margin expansion, share gains and new customer orders. AI data centers remain our fastest-growing market, expanding faster than we expected at the start of the year, with new orders beginning to ramp. In automotive, we continue to increase content per vehicle across regions and lock in new platform orders; industrial demand continues to improve, led by power infrastructure and energy applications. In the third quarter, we delivered revenue of US$1.722 billion, non-GAAP gross margin of about 41.2% and non-GAAP diluted earnings per share of US$0.90, all above the midpoint of guidance. The combination of stronger demand, improved mix and disciplined execution is driving significant operating leverage in our model, with earnings growing substantially faster than revenue. Some of our technology nodes remain supply-constrained, so in the third quarter and into the fourth quarter we made a short-term decision: to allocate supply to markets with strong end demand, such as AI data centers and industrialboth of which are performing much better than our original plan. In automotive, we are supporting all end-demand deliveries but not the backlog for inventory replenishment. As supply and demand rebalance, we expect automotive growth in 2027 to be consistent with our long-term target. In AI data centers, our revenue covers the complete power chain, from the power supply unit (PSU) all the way to the low-voltage smart power stage near the processorrising compute is driving higher power density requirements and higher semiconductor content. In the third quarter, our AI data center revenue grew 39% sequentially to US$180 million, and we now expect the business to generate about US$620 million in revenue in 2026, up 140% year over year. For 2027, we still expect AI data center revenue to double from 2026 as new products continue to ship. In the third quarter, we began volume shipments to several flagship platforms, including Googlesupplying both silicon carbide and silicon MOSFETs for power supply units and for 54V-to-12V applications. The migration to 800V architectures creates our next content opportunity, bringing AI data center power directly into our areas of strength. Our complete low-voltage to high-voltage power portfolio, spanning silicon, silicon carbide and vertical GaN, remains our competitive advantage, enabling us to address the need within the AI rack to convert directly from 800V to 54V, 12V and 6V rails. As power systems become more complex, customers increasingly need solutions that go beyond a single device. At last month's OCP Summit, we demonstrated an 800V-to-6V solution based on our differentiated vertical GaN technology, together with gate drivers and MOSFETs, achieving industry-leading efficiency and world-leading power density in the most challenging conversion stage of the AI rack. The migration to 800V high-voltage DC is also accelerating the shift from mechanical to solid-state power switching for fast disconnectfrom solid-state transformers and circuit breakers to hot-swap applications. Our silicon carbide JFET portfolio, with excellent thermal performance, has been designed in and is contributing to data center revenue. At our Investor Day, we talked about the investments we are making to build differentiated capabilities ahead of these market inflections. We are continuing to do so as power density becomes increasingly critical in AI data centers, automotive and industrial. One example is the EPP, or Embedded Power Platform, that we introduced at Investor Day. EPP uses the silicon wafer itself as the package, simultaneously addressing electrical, thermal and mechanical constraints. Since launch, customer interest in the platform has been encouraging, reinforcing our view that power density is becoming an increasingly important differentiator in automotive, AI data center and industrial applications. EPP has sampled to first (alpha) customers in these markets and is manufactured using our 12-inch silicon process in East Fishkill. Today we are also pleased to announce the acquisition of Ferric, which extends our capabilities further into integrated voltage regulators (IVRs) and positions us at the forefront of power delivery for next-generation AI processors. As processor power requirements continue to rise, IVRs integrate the complete power regulatorincluding controller, power switches, capacitors and magneticsinto a single package placed closer to the GPU, reducing power losses and solving the power density challenge at its core. Ferric has the industry's most competitive IVR solution, with industry-leading efficiency and transient response, an extremely compact footprint and best-in-class Z-height. We expect Ferric to increase our share of the core stage of the AI data center power chain. Although this is a multi-year opportunity for ON Semiconductor well beyond 2030, we are raising our 2030 AI data center revenue target by US$500 million to more than US$3 billion. Next, our industrial business. The spillover effects of AI are creating momentum beyond the data center. We expanded orders for hybrid EliteSiC and IGBT modules, with customers including Sungrow Power Supply and several other leading customers, driven by the 99.3%-efficient platform we launched last quarter. Also in industrial, we are seeing strengthening momentum in Siasun Robot&Automation and physical AIan area where our power and sensing capabilities are highly complementary to Synaptics. Demand for first-person-view (FPV) drones is driving increased shipments of our 2-megapixel and 8-megapixel Hyperlux image sensors, and we have established partnerships with more than ten leading drone manufacturers. We continue to diversify in the Siasun Robot&Automation market and have achieved new design wins in connectivity and sensing with several leading U.S. humanoid Siasun Robot&Automation manufacturers. In sensing, we are advancing indirect time-of-flight (iToF) technology to achieve world-class 1-millimeter depth resolution, up to 10 times better than competing solutions, enabling precise step perception for Siasun Robot&Automationcritical for Siasun Robot&Automation to interact with the physical world. As physical AI expands, these applications bring together multiple core capabilities of ours in power and sensing, creating significant new content opportunities for ON Semiconductor. Turning to automotive. As the industry evolves toward electrification, higher levels of autonomous driving and software-defined vehicles, we continue to win new customer designs across all regions. Our investments in new products continue to expand semiconductor content per vehicle, up to US$2,000 as architectures evolve. Even with relatively flat SAAR, these shifts create multiple content growth vectors for ON Semiconductor. We continue to gain share in the North American EV market, making progress on traction inverter designs and new onboard charger platform orders, and our already-launched Treo-based 10BASE-T1S is also ramping. With European OEMs, we expanded design wins across our power portfolio as they begin transitioning to 48V and zonal architectures. In China, we continue to expand our leadership in the premium OEM 900V EV segment, winning silicon carbide traction inverter orders for NIO's flagship sedan and for Geely Zeekr's rapidly expanding export models. Looking ahead, we are increasingly confident in the trajectory of the business. AI data centers continue to expand rapidly, automotive and industrial demand is improving, and content growth and new platform orders constitute multiple growth vectors. All of these trends are converging in areas where ON Semiconductor is differentiatedintelligent power and sensingand our disciplined execution enables us to convert this growth into stronger earnings and cash flow generation. I want to thank our employees around the world for their continued focus and execution. It is their work that enables us to serve customers and create value for shareholders. I will now turn the call over to Thad to detail the results and fourth-quarter guidance. **Thad Trent (Chief Financial Officer):** Thank you, Hassane. We believe the recovery is building momentum, and we are fundamentally stronger now than we were in previous quarters. We have more content, a broader market opportunity and significantly stronger profitability. With most of the heavy investment behind us, we are positioned to convert revenue growth into earnings and free cash flow growth. In the third quarter, we continued to see this benefit in our financial results. Third-quarter revenue was US$1.722 billion, above the midpoint of guidance and up 7% sequentially. Non-GAAP gross margin expanded 190 basis points sequentially to 41.2%, and non-GAAP earnings per share were US$0.90, growing 4 times faster than revenue year over year. At our Investor Day, we talked about the company continuing to invest ahead of major market inflections, building capabilities organically and supplementing them with strategic M&A to accelerate time to market. AI data centers are a clear example. As architectures evolve, we continue to strengthen our capabilities across the power chain, enabling ON Semiconductor to capture more of the opportunity. Today we announced the acquisition of Ferric for US$600 million plus up to US$175 million in contingent consideration tied to the achievement of revenue milestones. As Hassane said, Ferric positions us at the forefront of power delivery for next-generation AI processors. We expect Ferric to be accretive to our gross margin target, accretive to EPS at scale, with no material near-term financial impact. This is a multi-year opportunity that raises our 2030 AI data center revenue target by 20% to more than US$3 billion and accelerates from there. We expect the transaction to close in the fourth quarter, subject to customary closing conditions. More details on the acquisition are available on the company's Investor Relations website. Back to third-quarter revenue. Revenue was US$1.722 billion, up 7% sequentially and 11% year over year, US$22 million above the midpoint of guidance, with growth from industrial and AI data centers. Automotive revenue was US$777 million, down 1% both sequentially and year over year. The sequential decline was mainly due to supply reallocation to AI data center and industrial end markets. We expect fourth-quarter automotive revenue to decline by a high-single-digit percentage, reflecting continued supply reallocation and the timing and pace of customer deliveries. With supply coming online, we expect a return to normal levels in the first quarter. Industrial revenue was US$467 million, up 10% sequentially and 9% year over year. We are seeing strength in energy infrastructure, factory automation and the broader industrial market. We expect fourth-quarter industrial revenue to grow by a low-double-digit percentage. AI data center revenue was US$180 million, up 39% sequentially and 175% year over year. Demand continues to accelerate, and we now expect 2026 AI data center revenue of about US$620 million, with mid-teens percentage sequential growth in the fourth quarter. In 2027, we expect to double on a higher base. Please note that starting this quarter, we are enhancing disclosure transparency by reporting AI data centers separately as a fourth end market to better present this important growth driver. You will see this in the supplemental materials, on the Investor Relations website and in the Form 10-Q. Revenue from other end markets (now excluding AI data centers) was US$299 million, up 11% sequentially and 10% year over year, mainly due to normal seasonality in the wireless business. We expect fourth-quarter other revenue to grow by a high-teens percentage sequentially. Turning to the segment breakdown. Power Solutions Group (PSG) revenue was US$890 million, up 7% sequentially and 21% year over year. Analog & Mixed-Signal Group (AMG) revenue was US$597 million, up 9% sequentially and 2% year over year. Intelligent Sensing Group (ISG) revenue was US$235 million, up 3% sequentially and 2% year over year. Turning to gross margin. GAAP gross margin was 41.4%, and non-GAAP gross margin expanded for a fifth consecutive quarter to 41.2%, driven by utilization improvement since the start of the year and favorable mix from new products. Utilization was flat at 83%, and we expect a similar level in the fourth quarter, rising as demand signals improve into 2027. Our Fab Right (production line optimization) strategy remains an important contributor to the long-term gross margin opportunity. In the third quarter we closed the previously announced sale of a back-end facility and remain on track to complete the sale of the Mountain Top facility by the end of 2027. We are operating with a more focused and efficient manufacturing footprint, creating additional opportunities for long-term gross margin expansion. GAAP operating expenses were US$335 million, and non-GAAP operating expenses were about US$310 million. GAAP operating profit was US$378 million, or 22% of revenue; non-GAAP operating profit was US$400 million, or 23% of revenue. GAAP net income was US$314 million, and non-GAAP net income was about US$354 million. The GAAP tax rate was 21%, and the non-GAAP tax rate was 15%. GAAP share count was about 397 million shares, corresponding to GAAP earnings per share of US$0.79. Non-GAAP share count was about 392 million shares, corresponding to non-GAAP earnings per share of US$0.90. Turning to the balance sheet. Cash and short-term investments at quarter-end were about US$4.4 billion. Total liquidity was US$5.9 billion, including US$1.5 billion of undrawn revolving credit. Operating cash flow was US$516 million, and free cash flow was US$489 million, or 28% of revenue. Capital expenditure was US$28 million, or 1.6% of revenue, and we expect full-year capital expenditure of about 2% of revenue. Inventory increased US$22 million sequentially but fell 6 days to 186 days. Strategic inventory continued to be consumed in the third quarter, down 7 days; base inventory increased 1 day as we continued to support higher demand. Distribution channel inventory fell from 10.1 weeks in the second quarter to 9.9 weeks, with sell-through continuing to support a healthy channel and mass-market growth. In the third quarter we repurchased US$20 million of shares, with repurchase activity limited by trading restrictions related to the Synaptics acquisition and its renegotiation. Looking ahead, let me walk through the key elements of our fourth-quarter non-GAAP guidance. As a reminder, today's earnings release contains a table detailing GAAP and non-GAAP guidance. We expect fourth-quarter revenue of US$1.715 billion to US$1.815 billion, up 2.5% sequentially at the midpoint, an above-seasonal increase. We expect non-GAAP gross margin of 41.5% to 43.5%, including about US$8 million of stock-based compensation expense. At the midpoint, this implies a further 130 basis points of sequential expansion. Non-GAAP operating expenses are expected to be US$303 million to US$318 million, including about US$34 million of stock-based compensation expense. We expect non-GAAP other income of about a favorable US$27 million. We expect the non-GAAP tax rate to remain at 15% and non-GAAP diluted share count of about 392 million shares. This yields non-GAAP earnings per share of US$0.95 to US$1.07, with capital expenditure expected to be US$40 million to US$50 million. The fourth-quarter outlook reflects continued demand momentum and another step forward in our model. Based on current visibility, we expect this momentum to continue into 2027, with revenue continuing to grow and gross margin continuing to expand as we scale differentiated products and realize the benefits of a more efficient operating model. Looking ahead, the opportunity is not just a demand recovery. 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 growth path is less capital-intensive. As we close out the year, our priorities are clear: execute on current demand, scale differentiated platforms and capture the significant market opportunity ahead. We believe the company is well positioned to deliver sustained gross margin expansion and create long-term value for shareholders. I will now turn the call back to Daniel to open the line for questions. **II. Q&A session** **Operator:** Our first question comes from Vivek Arya of BofA Securities. **Vivek Arya (BofA Securities Research):** Hassane, you seem to be correctly de-weighting the automotive business in the second and third quarters. I assume the same in the fourth quarter, with a high-single-digit decline based on what you just said. But then you said automotive would return to its long-term growth trajectory next year, which I understand is roughly high-single-digit or 10%. I am curious whether being undersupplied to that market could have a market share impact over the long term? And where does the additional supply come from to grow in that market again next year? **Hassane El-Khoury:** Yes. First, I want to correct one characterization you used. We are not de-weighting the automotive market. Automotive remains strategically important as an end market. Even in the five-year outlook we highlighted at Investor Day, automotive remains our largest market, and that will not change. What you are seeing this quarter and next quarter, and what we are implying, is short-term in nature and supply-driven, not strategy-driven. What I mean is that we are not losing share, because we primarily work with OEMs and, as I mentioned in my prepared remarks, we are supporting all of their end demand; what we are holding backagain after communicating and aligning with themis the inventory replenishment they would have liked to do over a couple of quarters. We will resume shipments in the first quarter as supply comes onlinesupply has been coming online or increasing in the technologies where we have been constrainedbut you are seeing industrial and AI data center results that even exceeded our guidance and expectations. So in the short term we decided to adjust the mix a bit, but this is not a strategic decision. Our strategy is consistent with what we highlighted at Investor Day. That is also why we reiterate a return to growth in 2027, which itself shows there is no share loss. It is purely an inventory replenishment issue, not an end-demand issue, and it is short-term in nature. **Vivek Arya:** Understood. My follow-up is, Thad, could you walk us through the puts and takes on gross margin from third quarter to fourth quarter in terms of volume, mix and utilization. And then conceptually, how should we think about the potential for gross margin expansion in 2027 if automotive and industrial grow at the long-term rates you set and data centers potentially double? **Thad Trent:** Okay, Vivek, our gross margin framework is unchanged. The biggest driver of fourth-quarter gross margin expansion is utilization improvement. Please note that this reflects the utilization improvement from two quarters earlier. So you will start to see its impact. You will also start to see some impact from price adjustmentspreviously, rising input costs created a headwind reflected in the P&L, and now we are starting to see the positive impact of price adjustments. And the formula of 25 to 30 basis points of gross margin improvement for each 1 percentage point of utilization improvement still holds. It also holds going into 2027. So as I mentioned in my prepared remarks, we expect to continue growing, we expect utilization to continue improving as we enter 2027, and that will drive gross margin expansion throughout the year. Obviously, revenue growth will help as well. Another factor that is really starting to kick in is new products. We are getting favorable mix from that, as seen in the third quarter, with new products ramping at favorable gross margins. So that will be a nice tailwind going into next year. Then there is Fab Right; the announced back-end facility sale will show up a bit in 2027, and the Mountain Top facility more in 2028, which is also a tailwind going forward. **Operator:** Our next question comes from Blayne Curtis of Jefferies. **Blayne Curtis (Jefferies Research):** I want to follow up on the previous question. I assume automotive would have grown in the December quarter and is now down high-single-digit. I am trying to figure out how much inventory replenishment may already have occurred in the December quarter. I am also curious whether you see these trends strengthening. **Hassane El-Khoury:** Yes. The trends are strengthening. So there will beyou can think of it as a catch-up, because this inventory replenishment is not real end demand. We are supporting end demand, and that has not changed. So you can assume some seasonality on top of that. But from an inventory replenishment perspective, the demand does not go away. So you will see it recover in the first quarter as supply comes online. It is purelyyou can think of it as a quarterly timing issue. We are not guiding the first quarter. But once we get to the first quarter, you will see some of what would have happened in the fourth quarter, if normalized. I have always said that in automotive, and even in the multiple markets we serve, I do not look at sequential quarters and do not read too much into them. I look at trends and the decisions we are making. So I have zero concern about the decisions we are making in automotive. These are the right decisions for the company, to serve the industrial and AI data center demand we delivered in the third quarter and will continue to deliver in the fourth quarter, and then we will return to normal supply and demand starting in 2027, and for the rest of 2027 you will see us achieve our long-term targets. **Blayne Curtis:** Doubling the data center business again in 2027 is quite significant. I was wondering if you could give some rough drivers. **Hassane El-Khoury:** Yes. The rough picture is that across the entire power chainI have been saying for several quarters that we are winning designs across the whole power chain from high voltage to corethese are now landing and generating revenue. We have gone from design to design wins and now to revenue. In terms of customer breadth, we have highlighted some customers in the past, and you can roughly infer who some of them are; and it is across the power chain, including both where we work directly with compute vendors on board-level designs and through the supply chain, such as on the power supply unit side, which we have mentioned on the past several calls. All of these are maturing. We started ramping more programs in the third quarter, as we hinted at Investor Day. So these are all materializing. It is really execution, execution, execution. But more importantly, the new products we launched over the past two years are now starting to deliver. That ramp will continue in 2027, and there is also some new stuff we will bring to revenue in 2027 and are winning designs for now. To emphasize one point, the doubling in 2027 is on top of the higher base we just talked about today. So 2027 is even higher than we expected 90 days ago. **Operator:** Our next question comes from Joseph Quatrochi of Wells Fargo. **Joseph Quatrochi (Wells Fargo Research):** I want to follow up on that. You raised the 2030 revenue target by US$500 millionis that all from this acquisition? Or does it also include an increase in the base itself from 90 days ago? **Hassane El-Khoury:** It is related to this acquisition. **Joseph Quatrochi:** Okay. A follow-up: given the cash outlay for this acquisition and Synaptics, for which you are also issuing some debt, how should we think about uses of free cash flow and capital returns? **Thad Trent:** For the Ferric acquisition we will use cash on the balance sheet. After the Synaptics transaction closes, we will focus on deleveraging. That will be our top priority. Obviously that is after investing in the business. But we will focus on