It has been about a month since the last earnings report for ON Semiconductor Corp. (ON). Shares have added about 2.4% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is ON Semiconductor Corp. due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
ON Semiconductor Q3 Earnings Miss, Revenues Top Estimates
ON Semiconductor Corporation reported third-quarter 2019 non-GAAP earnings of 33 cents per share, which lagged the Zacks Consensus Estimate by 8.3%. Notably, the figure declined 42% from the year-ago quarter’s level.
Revenues of $1.382 billion beat the Zacks Consensus Estimate of $1.381 billion and declined 10% on a year-over-year basis. Notably, the figure was within management’s guidance of $1.355-$1.405 billion. Soft demand from industrial and automotive end-markets led to revenue decline.
Business Units Metrics:
ON Semiconductor has three business units — Power Solutions Group (revenues of $687.9 million), Analog Solutions Group (revenues of $508.9 million) and Intelligent Sensing Group (revenues of $185 million).
Automotive (32.3% of revenues) end-market revenues were approximately $445.9 million, down 3.3% year over year. Weakness in Asia and EMEA as well as broad-based softness in automotive market put pressure on segmental revenues.
Nonetheless, management noted that revenues from Greater China improved sequentially. Further, the company is banking on strong demand for its image sensors, ADAS, power management products, wireless charging, power MOSFETs and Silicon Carbide (SiC) products. Continued growth in ADAS and LEDs design wins are likely to be a tailwind going ahead.
Notably, the company holds a competitive edge over its peers when it comes to delivering a comprehensive image sensor solution for autonomous driving applications and ADAS. The solution features exhaustive range of pixel densities which include 1, 2, and 8 megapixels on a single platform.
Industrial/Medical/Mil-Aero (25.4%) end-market revenues declined 12.9% year over year to $350.5 million on broad-based soft demand.
Nevertheless, the company’s latest platform of products that include high and medium voltage power modules, including IGBTs, modules and FETs hold promise. The products are aimed to provide higher efficiency.
Communications (19.9%) end-market revenues declined almost 8% year over year to $274.7 million on sluggishness in demand from smartphone vertical.
Nonetheless, management is banking on strength in medium voltage MOSFETs, which is aiding the company to foray into key global markets, including 5G infrastructure.
Consumer (11.3%) end-market revenues came in at $156.9 million. The figure declined 26.2% from the year-ago quarter’s level, primarily due to weakness in consumer electronics and white-goods segment.
Computing (11.1%) declined 7.9% year over year to $153.9 million. Notably, strength in server solutions domain couldn’t mitigate the downside. Management noted that improving supply of Intel’s processors facilitated sequential growth.
Margins in Detail
Non-GAAP gross margin of 35.8% contracted 290 basis points (bps) on a year-over-year basis. Management attributes the decline to one-time adjustment pertaining to a customer matter and pressure on ASPs.
Non-GAAP operating expenses fell 2.3% from the year-ago quarter’s figure to $314.3 million. However, as a percentage of revenues, the figure expanded 180 bps on a year-over-year basis to 22.7%.
Non-GAAP operating margin contracted 480 bps on a year-over-year basis to 13%, thanks to lower gross margin.
Balance Sheet & Cash Flow
As on Sep 27 2019, ON Semiconductor had cash and cash equivalents of approximately $928.7 million, up from $885.2 million in the last reported quarter.
The company exited the third quarter with total debt (including current portion) amounting to $3.615 billion, down from $3.657 billion in the last reported quarter.
During the reported quarter, cash from operations came in at $242.2 million compared with the previous quarter’s figure of $222.4 million. The company also generated free cash flow of $130.5 million compared with $68.9 million reported in the previous quarter.
The company repurchased approximately 764K shares worth $13 million in the reported quarter. IP settlement litigation with Power Integrations and debt refinancing, limited share buybacks during the third quarter.
For the fourth quarter, ON Semiconductor forecasts revenues in the range of $1.350-$1.400 billion.
Management expects revenues from Automotive and Computing end-markets to improve sequentially in the fourth quarter. Revenues from Industrial end-market are anticipated to remain flat on a quarter-over-quarter basis. Meanwhile, Communications and Consumer end-markets are anticipated to decline sequentially in the third quarter.
For the fourth quarter, non-GAAP gross margin is projected in the range of 35.7-36.7%. Non-GAAP operating expenses are expected in the range of $312-$328 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
At this time, ON Semiconductor Corp. has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, ON Semiconductor Corp. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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