ON Semiconductor Beats on Q4 Earnings

Zacks

ON Semiconductor (ONNN) reported fourth-quarter 2013 earnings of 17 cents, exceeding the Zacks Consensus Estimate by 3 cents.

Revenues

ON Semi reported revenues of $718.0 million, up 0.4% sequentially and 5.6% year over year. Reported revenues were above the company’s expected range of $675.0–$705.0 million and the Zacks Consensus Estimate of $692.0 million.

Revenues by End Market

Automotive brought in 27% of the total revenue. Segment revenues were up 4.0% on a sequential basis. The growth was driven by strength across all product lines, especially protection, power MOSFET, drivers, ignition IGBTs, and switch-mode power-supply solutions.

ON Semi’s design wins in front-lighting applications, powertrain, body, infotainment, power supplies and in-vehicle networking are expected to contribute significantly as electronic content in new vehicles continues to increase.

Consumer generated 20% of the total revenue, up 2.0% sequentially. Results in the quarter were benefited by strong demand for intelligent power modules. Also, standard products and power management devices witnessed strength driven by volume production and ramp up of next-generation gaming systems.

ON Semi also acquired a design win with its integrated power modules with a key customer in Europe.

Computing generated 15% of the total revenue, up 1% sequentially. The share gains on Intel’s (INTC) Haswell platform led to a sequential increase in the reported quarter as this new platform ramped up volume production. ON Semi continued to win designs in several areas such as NCP6338 processor power converter, MOSFETs, drivers, LDOs and voltage regulators.

Industrial/Military/Aerospace/Medical generated another 20% of total revenue, down 2.0% from the prior quarter. The decline was due to softness in certain areas of military, medical and aerospace business.

Design wins in application-specific integrated circuits (ASICs) for both medical and military/aerospace applications, onshore military programs in the United States and hearing health and audiology products are gaining momentum.

Communications accounted for 18% of revenues and were down 4.0% from the prior quarter. The sequential decrease was due to a broad-based inventory correction in the smartphone market.

Though ON Semi continues to gain market share in various products such as battery protection, battery chargers, protection devices, filtering and power management ICs, it expects this segment to be down sequentially due to normal seasonality.

Margins

The GAAP gross margin for the quarter was 35.2%, up 40 basis points (bps) sequentially and 430 bps from the year-ago quarter driven by higher revenues. However, utilization rates declined sequentially in the fourth quarter due to holiday related shutdowns of manufacturing facilities.

ON Semi reported GAAP operating expenses of $190.6 million, down 44.2% from $341.8 million incurred in the year-ago quarter. As a percentage of sales, research & development, general & administrative, and selling & marketing expenses decreased from the year-ago quarter. The net result was a GAAP operating margin of 8.7% versus (19.3%) in the year-ago quarter.

Net Profit

On a pro-forma basis, ON Semi reported net income of $74.3 million or 17 cents per share compared with $75.4 million or 17 cents in the previous quarter and $37.0 million or 8 cents per share in the year-ago quarter. Our pro-forma estimate for the reported quarter excludes restructuring, intangibles amortization and other charges on a tax-adjusted basis but includes stock-based compensation. Our calculations may differ from the company’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 $41.9 million or 9 cents per share compared to $51.8 million or 11 cents in the previous quarter and a net loss of $138.2 million or loss of 31 cents in the year-ago quarter.

Balance Sheet

The cash and short-term investments balance was $625.7 million at quarter-end versus $553.6 million in the prior quarter. Trade receivables were $383.4 million, down from $419.2 million in the prior quarter. Inventories were $611.8 million, up 4.5% sequentially.

At quarter-end, ON Semi had $942.2 million of total debt (long-term plus short-term) on its balance sheet, with debt equity ratio being 38.6%. Cash flow from operations was $127.0 million, with $20 million of cash spent on capex.

Management repurchased 8.3 million shares worth $59.0 million in the quarter at an average price of $7.11.

Guidance

ON Semi expects first-quarter revenues in the range of $695.0–$725.0 million, the midpoint of $710.0 million being above the Zacks Consensus Estimate of $675.0 million. Both GAAP and non-GAAP gross margins are expected in the 33.0%–35.0% range. Operating expenses on a GAAP basis are expected within $171.0 –$184.0 million, while on a non-GAAP basis they are expected within $158.0–$168.0 million. Backlog levels are estimated to be approximately 80.0%–85.0%. The company also expects other income/expense to be within $7.0–$9.0 million, both on a GAAP basis and non-GAAP basis.

Taxes are expected to be within $5.0–$7.0 million on a GAAP basis and $3.0–$5.0 million on a non-GAAP basis, with share count at 445.0 million. Total capital expenditure is expected in the range of $45–$55 million for the first quarter of 2014.

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 reported a strong quarter with both the top- and bottom-line results exceeding our expectations. The overall business environment continues to improve and management expects order trends to remain healthy in the upcoming quarter.

The end-market demand trends indicate strengthening industrial and automotive markets and slightly weak computing and consumer markets. The communications end market is also expected to be down sequentially due to normal seasonality.

However, over the long term, ON Semi is well positioned for growth and market share gains in all its end markets. The company also acquired additional capacity through the SANYO acquisition that should come in handy once demand picks up. We expect the launch of new products and numerous design wins in communication, automotive and industrial markets to act as a solid catalyst for the company through 2014.

ON Semi has a Zacks Rank #2 (Buy). Other stocks that have been performing well and are worth a look include Melco Crown Entertainment Limited (MPEL), Supertex Inc (SUPX) and M/A-Com Technology Solutions Holdings, Inc. (MTSI). All these stocks carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on ONNN
Read the Full Research Report on MPEL
Read the Full Research Report on SUPX
Read the Full Research Report on MTSI


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