Why Is ON Semiconductor Corp. (ON) Down 8.5% Since Last Earnings Report?

It has been about a month since the last earnings report for ON Semiconductor Corp. (ON). Shares have lost about 8.5% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

ON Semiconductor Q4 Earnings Miss, Revenues Top Estimates

ON Semiconductor Corporation reported fourth-quarter 2019 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.

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 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.

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.

Guidance

For first-quarter 2020, ON Semiconductor forecasts revenues in the range of $1.355-$1.405 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.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -26.98% due to these changes.

VGM Scores

Currently, ON Semiconductor Corp. has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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. It's no surprise ON Semiconductor Corp. has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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