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ON Semiconductor (ON) Q4 Earnings Lag Estimates, Shares Down

Zacks Equity Research

Shares of ON Semiconductor Corporation ON declined 14% following fourth-quarter 2019 results. The company reported non-GAAP earnings of 30 cents per share, which lagged the Zacks Consensus Estimate by 9.1%. Notably, the figure declined 43% from the year-ago quarter’s level.

Revenues of $1.402 billion beat the Zacks Consensus Estimate of $1.376 billion. However, the top line declined 7% on a year-over-year basis. Soft demand from industrial and consumer end-markets led to revenue decline. Nevertheless, the figure was above the higher end of management’s guidance of $1.350-$1.400 billion.

The company intends to expand margins by enhancing manufacturing footprint and accelerate the timeline for production with the acquisition of 300mm East Fishkill fab. Moreover, the company also announced plans of selling its six-inch manufacturing facility in Oudenaarde, Belgium.



Notably, ON Semiconductor stock has declined 9% in the past year, against the industry’s rally of 19.7%.

Top-Line Details

Business Units Metrics:

ON Semiconductor has three business units — Power Solutions Group (revenues of $695.3 million), Analog Solutions Group (revenues of $507.3 million) and Image Sensor Group (revenues of $199.2 million).

End-Market Metrics:

Automotive (33% of revenues) end-market revenues were approximately $462.1 million, down 3.5% year over year. The decline can be attributed to broad-based softness in automotive market.

Nonetheless, management noted strength in China. Further, the company is banking on strong demand for its image sensors, ADAS, power management products, LiDAR, radar and Silicon Carbide (SiC) products. Continued growth in ADAS and vehicle electrification design wins are likely to be a tailwind going ahead. Management is optimistic on improving demand for IGBT modules across Asia and Europe.

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 (24.6%) end-market revenues declined 11.5% year over year to $344.3 million on broad-based soft demand.

Nevertheless, the company is witnessing strong demand for SiC modules, which holds promise.

Moreover, robust pipeline for the company’s CMOS image sensors across e-commerce vertical for warehouse automation systems and delivery robots is expected to be a key catalyst in the days ahead.

Communications (20.6%) end-market revenues declined 3.2% year over year to $289 million on sluggishness in demand from smartphone and 5G infrastructure verticals.

Computing (10.9%) declined 7.6% year over year to $153.4 million. Notably, strength in server solutions domain failed to negate the downside. Management noted that improving supply of Intel’s INTC processors facilitated sequential growth in client computing business.

Consumer (10.9%) end-market revenues came in at $152.9 million. The figure declined 10.4% from the year-ago quarter’s level, primarily due to softness in consumer electronics.
 

ON Semiconductor Corporation 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

Margins in Detail

Non-GAAP gross margin of 34.6% contracted 330 basis points (bps) on a year-over-year basis. For the fourth quarter, non-GAAP gross margin was anticipated in the range of 35.7-36.7%. Management attributes the decline to unanticipated high demand for a lower-margined product in consumer segment.

Non-GAAP operating expenses fell 1.2% from the year-ago quarter’s figure to $313.6 million. However, as a percentage of revenues, the figure expanded 130 bps on a year-over-year basis to 22.4%.

Non-GAAP operating margin contracted 450 bps on a year-over-year basis to 12.3%, owing to lower gross margin.

Balance Sheet & Cash Flow

As of Dec 31, 2019, ON Semiconductor had cash and cash equivalents of $894.2 million, compared with $928.7 million as of Sep 27 2019.

The company exited the fourth quarter with total debt (including current portion) amounting to $3.613 billion, down from $3.615 billion in the last reported quarter.

During the reported quarter, cash from operations came in at $91.7 million compared with the prior-quarter figure of $242.2 million.

Free cash flow came in at negative $130.5 million compared with $130.5 million generated in the previous quarter.

2019 at a Glance

In 2019, revenues declined 6.1% over 2018 tally to $5.518 billion.

Non-GAAP earnings of $1.49 per share declined almost 24% year over year.

Non-GAAP gross margin of 36.1% contracted 200 bps on a year-over-year basis.

Guidance

For first-quarter 2020, ON Semiconductor forecasts revenues in the range of $1.355-$1.405 billion. The Zacks Consensus Estimate is currently pegged at $1.35 billion.

Management expects revenues from Automotive end-market to improve sequentially in the first quarter. Revenues from Industrial end-market are anticipated to remain flat to decline slightly on a quarter-over-quarter basis. Meanwhile, Communications, Computing and Consumer end-markets are anticipated to decline sequentially in the first quarter.

For the first quarter, non-GAAP gross margin is projected in the range of 33.7-34.7%. Non-GAAP operating expenses are expected in the range of $327-$343 million.

Zacks Rank & Stocks to Consider

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

Splunk SPLK 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.

Long-term earnings growth rate for Splunk and Benefitfocus is pegged at 31.24% and 25%, respectively.

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