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ON Semiconductor (ON) Q3 Earnings Miss, Sales Beat Estimates

Zacks Equity Research

ON Semiconductor Corporation ON 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.

Notably, shares of ON Semiconductor have returned 28.5% year to date compared with the industry’s rise of 31%.

Top-Line Details

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).

End-Market Metrics:

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.

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 INTC processors facilitated sequential growth.

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.

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.

Bleak Guidance

For the fourth quarter, ON Semiconductor forecasts revenues in the range of $1.350-$1.400 billion. The mid-point of the guidance, $1.375 billion, is below the Zacks Consensus Estimate that is currently pegged at $1.38 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.

Zacks Rank & Stocks to Consider

Currently, ON Semiconductor carries a Zacks Rank #4 (Sell).

Five9 FIVN and Benefitfocus BNFT are some better-ranked stocks in the broader computer and technology sector, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Five9 and Benefitfocus are set to report quarterly results on Nov 5 and 6, respectively.

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