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Why Is ON Semiconductor Corp. (ON) Down 21.1% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for ON Semiconductor Corp. (ON). Shares have lost about 21.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is ON Semiconductor Corp. due for a breakout? 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 catalysts.

ON Semi Beats on Q1 Earnings, Revenues Lag Estimates

ON Semiconductor Corporation delivered first-quarter 2019 non-GAAP earnings of 43 cents per share, beating the Zacks Consensus Estimate by 3 cents. Moreover, the figure increased 7.5% year over year.

The company reported revenues of $1.386 billion, missing the Zacks Consensus Estimate of $1.394 billion. Notably, the figure was within management’s guided range of $1.365-$1.415 billion. However, it grew 1% year over year.

Notably, ON Semiconductor Aizu Co., Ltd., or OSA accounted for $18 million of first-quarter revenues. OSA refers to 8-inch wafer fab manufacturing joint venture based out of Aizu-Wakamatsu, Japan.

Sturdy adoption and favorable product mix of the company’s diversified product portfolio and end-markets drove year-over-year growth amid soft demand from Greater China.

Recently, ON Semiconductor inked a deal to acquire the provider of high performance Wi-Fi solutions, Quantenna Communications, Inc. The transaction is expected to strengthen the acquirer’s connectivity portfolio.

Quarter in Detail

Business Units Metrics:

ON Semiconductor has three business units namely — Power Solutions Group (revenues of $704 million), Analog Solutions Group (revenues of $494 million) and Intelligent Sensing Group (revenues of $188 million).

End-Market Metrics:

Automotive (34% of revenues) end-market revenues were approximately $465 million, up 4% year over year.

In the reported quarter, the company’s CMOS image sensors, ADAS, power management products, wireless charging, mixed signal ASICs, MOSFETs and sensor interface products witnessed strong demand.

Continued growth in ADAS and LEDs design wins fueled growth. Expanding IGBT and Silicon Carbide (SiC) product portfolio hold promise.

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.

Management is optimistic about growing influence of its ADAS offerings.

Moreover, the company recently announced that its CMOS image sensors will support NVIDIA DRIVE Constellation simulation platform with real-time data. NVIDIA leverages ON Semiconductor’s superior imaging technology and is designed to bolster video adoption within IoT products and accelerate OEMs’ ability to offer advanced solutions to the IoT market.

However, weakness in China weighed on segmental revenues growth.

Industrial (26%) end-market revenues decreased 5% year over year to $359 million. Softness in China region impacted industrial market.

However, the company’s latest platform of products including high and medium voltage power modules 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.

Communications (19%) end-market revenues surged 15% year over year to $259 million. The company’s strength in medium voltage MOSFETs is aiding it in penetrating key global markets, including 5G infrastructure.

Notably, slowdown witnessed in smart-phone market was partially mitigated by increased adoption of its content on major platforms.

Computing (10%) grew 1% year over year to $144 million, primarily on the back of sturdy server solutions domain.

Consumer (12%) end-market revenues came in at $160 million. The figure declined 15% from the year-ago quarter, primarily owing to weakness in consumer electronics and white-goods segment.

Operating Details

Non-GAAP gross margin of 37% contracted 60 bps on a year-over-year basis. OSA venture limited margin expansion by 50 bps in the reported quarter. Further, increase in select input costs impacted the margin.

Non-GAAP operating expenses decreased marginally 0.7% from the year-ago quarter to $298.5 million.

Non-GAAP operating margin contracted 20 bps on a year-over-year basis to 15.5%. OSA venture largely impacted operating margin.

Balance Sheet & Cash Flow

As on Mar 29, 2019, ON Semiconductor had cash and cash equivalents of approximately $939.6 million, down from $1.070 billion reported in the previous quarter.

The company exited the first quarter with total debt (including current portion) amounting to $2.769 billion up from $2.766 billion in the previous quarter.

During the reported quarter, cash from operations came in at $138.2 million compared with the previous quarter’s figure of $421 million. The company also generated free cash flow of ($18.8) million compared with $289 million reported in the previous quarter.

The company repurchased 4.4 million shares worth $75 million in the reported quarter.

Guidance

For the second quarter of 2019, ON Semiconductor forecasts revenues to be in the range of $1.360-$1.410 billion (mid-point $1.385 billion), given its booking trends, estimated turn level and backlog level. Revenues for second quarter include roughly $15 million from manufacturing services provided by OSA.

Seasonality and uncertainty in macroeconomic environment, primarily sluggishness in Greater China is compelling management to stay cautious. Softness in smartphone market and stabilizing capital expenses by cloud service providers (CSPs) remain concerns.

Non-GAAP gross margin is projected to be in the range of approximately 36.5-37.5%. Non-GAAP operating expenses are expected in the range of $295-$309 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, ON Semiconductor Corp. has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% 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.

Outlook

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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