ON Semiconductor (ONNN) reported second-quarter 2014 earnings of 20 cents, exceeding the Zacks Consensus Estimate by a penny, driven by higher revenues and solid cost cutting measures undertaken by management.
Revenues
ON Semiconductor reported revenues of $757.6 million, up 7.2% sequentially and 10.1% year over year. Reported revenues came toward the higher end of the company’s expected range of $738.0–$768.0 million and beat the Zacks Consensus Estimate of $755.0 million.
Revenues by End Market
Automotive brought in 29% of the total revenue. Segment revenues were up 4% on a sequential basis. The growth was driven by strength across all product lines, especially standard products in automotive-related applications, such as lighting, infotainment, transmission and control applications. Other products including ignition IGBTs, voltage regulators, switch mode power supplies and application-specific integrated circuits (ASICs) also gained traction.
ON Semiconductor’s design wins for integrated power modules in front-lighting and oil pump applications are expected to contribute significantly as electronic content in new vehicles continues to increase. The company has secured many auto design wins in Europe and Korea in the reported quarter, which is expected to contribute to revenues in the near future.
Management expects this segment to be approximately flat to up slightly on a sequential basis due to normal seasonality.
Consumer generated 18% of the total revenue, up 11% sequentially. Results in the quarter were driven by strong demand for intelligent power module solutions. The company saw strong demand for fan driver solutions for refrigerators, ASIC and IGBT.
ON Semiconductor acquired few design wins with its next-generation consumer electronic systems, white goods, set-top boxes and brushless DC motor drivers, which are expected to drive revenues, going forward.
Management expects a marginal decline in this segment sequentially due to seasonality in the white good business.
Computing generated 14% of the total revenue, up 3% sequentially driven by stabilization in the PC market and Vcore market share gains as Haswell and Broadwell platforms continue to gain traction. Vcore shipments increased more than 10% on a sequential basis, driven by a richer mix of Haswell and Broadwell platforms. Also, strong demand for MOSFETs and protection products in PCs and hard disk drives led to the increase.
Management expects revenues to be up sequentially.
Industrial/Military/Aerospace/Medical generated another 22% of total revenue, up 12% from the prior quarter. The increase was driven by strong demand for industrial circuit breakers, medical imaging and magnetic card swipe readers for mobile point-of-sales applications. Also, Truesense acquisition aided the revenue growth.
Design wins in ASICs for both medical and military/aerospace applications, onshore military programs in the United States and hearing health and audiology products are gaining momentum.
Industrial segment revenues are expected to be up sequentially in the upcoming quarter.
Communications accounted for 17% of revenues and was up 6% from the prior quarter due to normal seasonality, ramp up of new programs and continued momentum in the Chinese smartphone market.
ON Semiconductor continues to gain market share in various products such as battery protection, battery chargers, protection devices, filtering and power management ICs. Also, demand for lithium-ion battery MOSFETs is expected to accelerate driven by increased adoption across various smartphone OEMs. Numerous design wins in the smartphone market for display power, LED drivers, camera modules and battery solutions will help increase revenues in the upcoming quarter.
Management expects this segment to gain sequentially in the third quarter.
Margins
The GAAP gross margin for the quarter was 36%, up 50 basis points (bps) sequentially and 230 bps from the year-ago quarter. The increase was driven by improved mix, resulting from strong growth in higher-margin industrial, automotive and smartphone businesses.
ON Semiconductor reported GAAP operating expenses of $191.3 million, up 5.7% from $180.9 million incurred in the year-ago quarter. As a percentage of sales, research & development expenses decreased from the year-ago quarter, while general & administrative increased slightly, and selling & marketing expenses remained flat. The net result was a GAAP operating margin of 10.8% versus 7.4% in the year-ago quarter.
Net Profit
On a pro-forma basis, ON Semiconductor reported net income of $89.7 million or 20 cents per share compared with $75.2 million or 17 cents in the previous quarter and $57.2 million or 13 cents in the year-ago quarter. Our pro-forma estimate for the reported quarter excludes restructuring, intangibles amortization and other charges on a tax-adjusted basis but includes stock-based compensation. Our calculations may differ from the company’s presentation due to the inclusion/exclusion of some items that were not considered by management.
On a GAAP basis, the company recorded a net profit of $88.0 million or 20 cents per share compared with $58.4 million or 13 cents in the previous quarter and $47.7 million or 11 cents in the year-ago quarter
Balance Sheet
The cash and short-term investments balance was $601.2 million at quarter-end versus $617.0million in the prior quarter. Trade receivables were$437.3 million, up from $417.1million in the prior quarter.Inventories were$632.6 million, up 3% sequentially.
At quarter-end, ON Semiconductor had $904.9 million of total debt (long-term plus short-term) on its balance sheet, with debt equity ratio being 35.6%. Cash flow from operations was $151.6 million, with $49 million of cash spent on capex.
During the quarter, management used approximately $38 million to repay long-term debt and capital leases. The company repurchased 1.1 million shares worth $11.0 million in the quarter at an average price of $9.59 per share.
Guidance
ON Semiconductor expects third-quarter revenues in the range of $765.0–$795.0 million, the mid-point of $780.0 million being below the Zacks Consensus Estimate of $784.0 million. Gross margins are expected in the 35.6–37.6% range on a GAAP basis and within the 35.9–37.9% range on a non-GAAP basis. Operating expenses, on a GAAP basis, are expected within $184.0–$196.0 million, and within $170.0–$180.0 million on a non-GAAP basis. The company also expects other income/expense to be within $7.0–$9.0 million, both on a GAAP and non-GAAP basis.
Taxes are expected to be within $8.5–$11.5 million on a GAAP basis and $6.5–$8.5 million on a non-GAAP basis, with share count of 444.0 million.
Conclusion
ON Semiconductor has a well-diversified business and an end-market focus that would typically generate relatively steady revenues throughout the year. The company reported a decent quarter with both the top and bottom-line results exceeding our expectations. The overall business environment continues to improve and management expects order trends to remain healthy in the upcoming quarter.
The end-market demand trends indicate strengthening industrial, communications, computing and automotive markets in the near term. However, the consumer end market is expected to be down sequentially due to seasonality.
Also, restructuring measures related to System Solutions Group (SSG) should continue to contribute to margin expansion in the near term. Also, the recent closure of the back-end facility in Japan should generate savings, going forward.
Over the long term, ON Semiconductor is well positioned for growth and market share gains in all its end markets. We expect the product launches and numerous design wins in communication, automotive and industrial markets to act as strong catalysts throughout 2014.
ON Semiconductor has a Zacks Rank #2 (Buy). Other stocks that have been performing well and are worth a look include Analog Devices (ADI), Agilent Technologies (A) and Fairchild Semiconductor International Inc. (FCS). All these stocks carry the same Zacks Rank as On Semiconductor.
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