On Aug. 7, semiconductor, sensor, and integrated circuits maker ON Semiconductor (NASDAQ:ON) reported second-quarter 2017 results that exceeded management's guidance. Later in the day, I caught up with ON's David Somo -- the company's vice president of corporate strategy and marketing -- to talk about the industry, where things are headed, and what ON is doing to grow its piece of the pie.

ON senior vice president David Somo.

David Somo, ON Semiconductor's senior vice president of corporate strategy and marketing. Image source: ON Semiconductor.

A more connected world = a more helpful world

ON Semiconductor is often lumped in with what has been dubbed the Internet of Things (IoT) movement, an oft-used term that has become almost generic. What is it exactly?

At the highest level, Somo defines it as "a way to bridge the physical and digital worlds with intelligent technology." Digging a little deeper, this essentially refers to machines and systems that are aware of their environment and deliver data to help improve our lives.

For ON, the rubber meets the road with the devices themselves, like the companies IoT Development Kit -- a hardware package with supporting software designed to help engineers quickly develop a range of devices from smart-home to industrial applications. The "out-of-the-box ready-to-deploy" system recently won the IoT Evolution Product of the Year award from IoT Evolution magazine.

With so many devices coming online, the industry is all about making development and testing of connected systems a quick process. The easier the kit is to use and the more comprehensive its coverage of the connected industry overall, the more likely an engineer is to do business with ON.  Speaking to the importance of this, Somo had this to say:

As the market environment and application needs changed, we've evolved our business model to go from components, to modules, to more platforms. We are into systems enablement with the components and modules we offer. As devices become intelligent and need to be connected ... semiconductor companies are stepping up in applications capabilities, and ON Semiconductor is certainly trying to lead in this area to offer an out-of-the-box type of solution for customers to jump-start their development.

New developments at ON

ON has been aggressively moving into connected automobiles and other industrial applications in recent years, building out a portfolio of differentiated products to capture more share of client's end systems.

To that end, artificial intelligence (AI) has begun to enter the equation for ON. Another buzzword in the tech industry, Somo defines it simply as a device gathering environmental data, looking for patterns in that data, and continuously learning from those patterns.

Perhaps the most visible part of the AI movement is with digital assistants like the Amazon (NASDAQ: AMZN) Echo, but the technology is getting applied mostly outside of consumer markets. Data center management, industrial robotics, and autonomous vehicles are some notable examples, Somo said.

AI is typically the realm of tech companies like Intel (NASDAQ: INTC) and NVIDIA (NASDAQ: NVDA), which provide the processing horsepower, but ON has found that the massive amounts of data being sent to the brain of a system like an autonomous-driving car or an industrial robot affects efficiency.

For example, in an autonomous car, the processor has to continuously parse through and make decisions on information coming from a dozen different sensors, including radar (object detection using radio waves) and lidar (object detection using light imaging) sensors. All that data transfer bogs down not just the main processor, but also the connections in the car carrying the data.

To help speed things up, Somo said, ON is building a single processor unit into its sensors to do some front-end decision making before sending relevant data to the main brain. That helps free up processing power, but more importantly it reduces the amount of bandwidth being consumed in the internal system of the car itself. That helps reduce the lag time as information is sent back and forth from the peripheral device to the brain of the car, a critical process for safety of the vehicle and its passengers.

An illustration of various connected devices getting hooked up to the internet.

Image source: Getty Images.

A peek into the next decade

Estimates for the number of connected devices in operation by the end of this decade are all over the board, with some saying as many as 50 billion devices compared to about 8 billion now. Somo said ON tends to think in the 25 billion-to 30 billion-connection range by 2020, but it's almost impossible to say for sure.

The one thing that is for certain is that the opportunity is huge and there is plenty of new business to go around. ON provides a lot of detail on what industries are paying the bills, and currently the automotive and industrial sectors make up just shy of 60% of revenues. I asked Somo if that number will be consistent in the years ahead, or if ON will expand its presence into other areas.

I think automotive and industrial both have long legs under them, thinking about the megatrends that are there. Take automotive, there are four key megatrends, two of which we play in strongly and one we have some play in. The first is autonomous vehicles where you're building higher levels of autonomy ... we have a couple decades of runway to get there in capabilities.

Electric vehicles, we're hearing a lot of noise from companies like Volvo or Subaru, or like Audi and BMW all talking about a healthy percentage of their vehicle fleets are going to be electric motors by 2025.

The third megatrend is connected vehicles. We participate inside the vehicles, so connecting everything inside the vehicle, whether it's wired or wireless like Bluetooth. But there's also outside the vehicle as well, vehicle-to-vehicle, or vehicle-to-grid, and that's going to be more 5G-technology enabled.

The final area is in mobility services around autonomous vehicles. We really aren't quite at that level from an ecosystem vantage point. There is significant competition taking place there ... between the traditional automotive manufacturers and the ride sharing services like Uber and Lyft, that are competing for how that is going to work over time.

The answer in short is the company is always looking for new growth opportunities, but likes its current breakdown. Somo sees much connected device growth happening in the industrial economy for years to come, providing plenty of opportunity.

The state of the industry now

Even though connected devices are booming, Somo said in ON's view the industry is well-balanced from a supply and demand perspective. Often fraught with periods of boom and bust as supply and demand changes, the company sees things as being neither hot nor cold but just right. Persisting balance between supply and demand means steady growth without substantial risk of an industry crash. That's good for all IoT companies, and is a good situation for ON as it continues to expand on its role as a device and connected systems supplier. 

Nicholas Rossolillo owns shares of ON Semiconductor. The Motley Fool owns shares of and recommends Amazon and Nvidia. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.