ON Semi Earnings In Line, Revs Down Y/Y

Zacks

ON Semiconductor (ONNN) reported second-quarter 2013 earnings of 13 cents, in line with the Zacks Consensus Estimate.

Revenues

ON Semi reported revenues of $688.3 million, up 4.1% sequentially but down 7.6% year over year. Reported revenues were toward the lower end of the company expected range of $675.0–$715.0 million.

Revenues by End Market

Automotive brought in 28% of total revenue. Segment revenues were up 4.1% on a sequential basis. ON Semi witnessed growth in both North American and Chinese vehicle markets and worldwide luxury light vehicle sales. Further, strong demand in their in-vehicle networking products such as sensor interface for engine management, interior and exterior lighting, in-vehicle networking and in-body electronics fueled growth.

ON Semi has been winning designs in powertrain, body, infotainment, power supplies and in-vehicle networking, contribution from which should grow as the electronic content in new vehicles continues to increase. ACISs, LED lighting, park assist and start-stop, and new braking applications are seeing strong demand.

Consumer generated 20% of total revenue, up 0.8% sequentially. Results in the last quarter were benefited from the recovery of white goods sales in China. Rise in adoption of SANYO intelligent power modules are also a positive for the future.

ON Semi also witnessed strong adoption of its CPU and graphics power controllers, DC power switching devices, drivers, MOSFETs, ESD protection, LDOs, clock management, thermal monitoring devices, temperature sensors and small signal ICs in game consoles.

Computing generated 16% of total revenue, up 1.4% sequentially. Management is challenged by the weakness in the computing market although it is enjoying a leadership position in VCore power and notebook adapters. ON Semi expressed optimism that share gains would increase further when Intel’s (INTC) Haswell platform gains momentum in the second half of the year.

ON Semi continued its design wins in several areas such as VR12.5 controllers, MOSFETs, drivers, LDOs and voltage regulators.

Industrial/Military/Aerospace/Medical generated another 19% of total revenue, up 5.1% from the prior quarter. Steady order flow and design wins drove the sequential growth. It is witnessing steady orders for its switchgear and circuit breaking solutions for residential and consumer building. Further, design wins in in-bus building automation device are gaining momentum.

Communications accounted for 17% of revenues and were up 10.2% from the prior quarter. Normal seasonality and platform transition at an original equipment manufacturer (:OEM) were the main reasons for the growth in the second quarter.

Three new smartphones incorporating ON Semi’s optical image stabilization ICs were launched by key OEMs in Asia and Europe. It also witnessed a steady growth in its autofocus ICs, battery chargers, protection, common mode filter and power management ICs. Design win momentum continues for ON Semi’s power and battery management solutions with leading OEMs.

Margins

The GAAP gross margin for the quarter was 33.7%, up 274 basis points (bps) sequentially but down 100 bps from the year-ago quarter. Excluding the impact of pension-related expenses, non GAAP gross margin improved sequentially due to higher factory utilization at ON legacy operations.

Total operating expenses were $180.9 million, up 8.5% sequentially but down 21.8% year over year. The contraction from the year-ago quarter was due to lower selling and marketing (S&M) and general and administrative (G&A) expenses as a percentage of sales.

Net Profit

On a pro forma basis, ON Semi reported net income of $57.2 million or an 8.3% net income margin, compared with $44.7 million or 6.8% in the previous quarter and $65.0 million or 8.7% in the year-ago quarter. Our pro forma estimate for the last quarter excludes restructuring, intangibles amortization and other charges on a tax-adjusted basis but includes stock-based compensation. Our calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.

On a GAAP basis, the company recorded a net profit of $47.7 million or 11 cents per share compared to $22.6 million or 5 cents per share in the previous quarter and $6.9 million or 2 cents per share in the year-ago quarter.

Balance Sheet

Inventories were down 0.3% to $559.7 million while inventory turns were flat at 3.3X in the second quarter.

The cash and short-term investments balance was $579 million at quarter-end with ON Semi generating $55.2 million from operations. At quarter-end, ON Semi had $686.3 million of long-term debt on its balance sheet.

Management repurchased 1.5 million shares worth $12.1 million in the quarter.

Guidance

ON Semi expects third-quarter revenues in the range of $700.0–$730.0 million. Both GAAP and non-GAAP gross margins are expected in the 33.8%–35.8% range. Operating expenses on a GAAP basis are expected to be $170.0–$180.0 million, while on a non-GAAP basis they are expected to be $160.0–$170.0 million. Backlog levels are estimated to be approximately 80.0%–85.0%. ON Semi also expects other income/expense to be $7.0-$9.0 million, both on a GAAP basis and non-GAAP basis.

Taxes are expected to be $4.0–$5.0 million on a GAAP basis and $3.0-$4.0 million on a non-GAAP basis, with fully diluted share count at 453.0 million.

Conclusion

ON Semi has a well-diversified business and an end-market focus that would typically generate relatively steady revenues throughout the year. The company also acquired additional capacity through the SANYO acquisition that should come in handy once demand picks up.

The end-market demand trends indicate strengthening computing and automotive markets and steadier industrial and consumer markets. Improvement in SANYO is dependent on recovery in demand in Asian markets, specially China and Japan and elimination of manufacturing issues.

ON Semi has a Zacks Rank #4 (Sell). Semiconductor stocks that are worth considering include Advanced Micro Devices (AMD) and Microchip Technology Inc. (MCHP), all carrying a Zacks Rank #2 (Buy).

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