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ON Semiconductor (ON) Q2 Earnings In Line, Sales Lag Estimates

Zacks Equity Research

ON Semiconductor Corporation ON reported second-quarter 2019 non-GAAP earnings of 42 cents per share in line with the Zacks Consensus Estimate. Notably, the figure declined 9% from the year-ago quarter.

Revenues of $1.348 billion missed the Zacks Consensus Estimate of $1.384 billion and declined 7% on a year-over-year basis. Notably, the figure was within management’s guided range of $1.36-$1.41 billion.

Huawei related headwinds, soft demand from Greater China and Asia lead to weakness in majority of the company’s end-markets, which in turn resulted in revenue decline.

ON Semiconductor concluded acquisition of Quantenna Communications, the provider of high performance Wi-Fi solutions, toward the end of the second quarter. The transaction is expected to strengthen the acquirer’s connectivity portfolio in Industrial IoT vertical. Notably, Quantenna’s contribution is anticipated to be meaningful from the third quarter.

The company also inked deal with GLOBALFOUNDRIES to acquire 300mm fab based in East Fishkill, NY. Management aims to deliver power products based on 300 mm as early as 2020. The latest fab is anticipated to aid the company in reducing manufacturing costs and save more, to realize its long-term target goals, sooner.

Shares Down on Bleak Q3 Revenue Guidance

Following not-so-encouraging first-quarter results and bleak third-quarter revenue guidance, shares of ON Semiconductor are down almost 6.7% in the pre-market.

Markedly, for the third quarter, ON Semiconductor forecasts revenues to be in the range of $1.355-$1.405 billion. The guidance misses the Zacks Consensus Estimate currently pegged at $1.46 billion.



The company’s stock has returned 21% year to date, underperforming the industry’s rally of 29.2%.

Top Line Details

Business Units Metrics:

ON Semiconductor has three business units namely — Power Solutions Group (revenues of $700.9 million), Analog Solutions Group (revenues of $462.1 million) and Intelligent Sensing Group (revenues of $184.8 million).

End-Market Metrics:

Automotive (32.2% of revenues) end-market revenues were approximately $434 million, down 4.6% year over year. Weakness in Asia, primarily in China and broad-based softness in automotive market weighed on segmental revenue growth.

However, management is banking on strong demand for the company’s 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 (26.9%) end-market revenues decreased 11.7% year over year to $362.6 million. Softness in China region impacted the industrial market.

However, the company’s latest platform of products including high and medium voltage power modules, including IGBTs and FETs aimed at providing higher efficiency hold promise. Management is also optimistic regarding the growing influence of company’s products in medical domain, primarily in hearing and personal diagnostics markets.
 

ON Semiconductor Revenue (Quarterly)

ON Semiconductor Corporation Revenue (Quarterly)

ON Semiconductor Corporation revenue-quarterly | ON Semiconductor Corporation Quote

Communications (18.4%) end-market revenues improved almost 7% year over year to $247.8 million. The company’s strength in medium voltage MOSFETs is aiding it in penetrating key global markets, including 5G infrastructure. Notably, revenues from smart-phone domain grew year over year.

Reportedly, blacklisting of Huawei limited revenue growth. However, management notes that “partial shipments” resumed “to this customer” (most likely indicating Huawei) in agreement with US federal law.

Computing (10.4%) declined 7.5% year over year to $139.5 million. Notably, strength in server solutions domain couldn’t mitigate the decline.

Consumer (12.2%) end-market revenues came in at $163.9 million. The figure declined 21.3% from the year-ago quarter, primarily owing to weakness in consumer electronics and white-goods segment.

Margins in Detail

Non-GAAP gross margin of 37.1% contracted 100 bps on a year-over-year basis. Management attributes the decline to lower revenue base.

Non-GAAP operating expenses decreased 9.3% from the year-ago quarter to $288.2 million. As a percentage of revenues, the figure contracted 40 bps year over year.

Non-GAAP operating margin contracted 60 bps on a year-over-year basis to 15.7%, owing to lower gross margin.

Balance Sheet & Cash Flow

As on Jun 28, 2019, ON Semiconductor had cash and cash equivalents of approximately $885.2 million, down from $939.6 million reported in the previous quarter.

The company exited the second quarter with total debt (including current portion) amounting to $3.657 billion, up from approximately $2.77 billion in the previous quarter.

During the reported quarter, cash from operations came in at $222.4 million compared with the previous quarter’s figure of $138.4 million. The company also generated free cash flow of $68.9 million compared with ($18.6 million) reported in the previous quarter.

The company repurchased 2.6 million shares worth approximately $50 million in the reported quarter.

 

ON Semiconductor Price, Consensus and EPS Surprise

 

ON Semiconductor Corporation Price, Consensus and EPS Surprise

ON Semiconductor Corporation price-consensus-eps-surprise-chart | ON Semiconductor Corporation Quote

Guidance

Seasonality and uncertainty in macroeconomic environment, primarily weakness in Greater China is compelling management to stay cautious. Revenues from Automotive, Industrial, Computing and Consumer end-markets are anticipated to decline sequentially in the third quarter.

Nonetheless, management anticipates growth in adoption of its content on new platforms and meaningful revenues from Quantenna acquisition, to drive quarter-over-quarter growth in Communications end-market. Also, accelerated deployment of 5G favors prospects over the longer haul.

For third-quarter, non-GAAP gross margin is projected to be in the range of approximately 36.7-37.7%. Non-GAAP operating expenses are expected in the range of $315-$331 million.

Zacks Rank & Stocks to Consider

Currently, ON Semiconductor carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector worth considering are Rosetta Stone RST, Five9, Inc. FIVN and Anixter International AXE. All the three stocks flaunt a Zacks Rank #1 (Strong buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Rosetta Stone, Five9 and Anixter is currently pegged at 12.5%, 10% and 8%, respectively.

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