ON Semiconductor ON reported second-quarter 2015 earnings of 22 cents, meeting the Zacks Consensus Estimate. The results were driven by strong execution and good cost management.
Revenues
ON Semiconductor reported revenues of $880.5 million, up 1.1% sequentially and 16.2% year over year. Reported revenues were toward the lower end of the company’s expected range of $876.0–$916.0 million. Revenues however missed the Zacks Consensus Estimate of $897.0 million.
Revenues by End Market
Automotive accounted for 32% of total revenue. Segment revenues were down 3% on a sequential basis, mainly due to broad based inventory adjustment.
The weakness in Europe and Japan also led to the sequential decrease as Europe is the largest market for the company’s automotive related sales. Furthermore, a customer related production issue brought about some volatility in orders.
However, the company believes that it will gain traction with image sensors, MOSFETs, Smart FETs, LED drivers, parking sensor interface and power supply products in the automotive market. The company is also seeing momentum in the design win pipeline and increased investment in ADAS.
Industrial/Military/Aerospace/Medical contributed 24% of total revenue, down 1% from the prior quarter. The decrease was due to weakness in Europe, Japan, and the Asia-Pacific region excluding China. The Americas was up slightly while China was up strongly driven mainly by solid gains in image sensors for security applications.
Design wins in ASICs, for both medical and military/aerospace applications, onshore military programs in the United States and hearing health and hearing products are encouraging.
Also the acquisition of AXOM, a provider of low power radio frequency (RF) chips, will help the company expand its footprint further in the high growth industrial IOT segment.
Communications accounted for 18% of revenues and was up 16% on a sequential basis. This was attributed to strong design win ramps at China based smartphone OEMs.
Auto-focus and optical image stabilization modules, battery protection FETs, EEPROM’s battery chargers, ESD protection and power management ICs led to share gains at global smartphone leaders and Chinese smartphone OEMs. This is expected to impact revenues positively in the upcoming quarters.
Also, management expects to see revenue contribution from its wireless charging solutions in the second half of the year, followed by a massive ramp up in 2016 and beyond.
Consumer generated 15% of total revenue, up 2% sequentially. Demand for white goods, sports action cameras, home electronics and consumer gaming electronics led sales in the segment. Also, adoption of intelligent power modules in white goods applications in China remained strong.
Going forward, the company expects to see strong acceleration in demand from action sports camera applications.
Computing generated 11% of total revenue this quarter, down 4% sequentially. The company believes that it is beginning to see the first signs of expected share gains in this space. It has also started receiving orders for Intel’s INTC Skylake platform and expects further share gains going ahead. Share gains on the Skylake platform coupled with higher content should help the company boost computing revenues despite declines in the computing market.
Margins
Pro-forma gross margin was 34.6%, up 7 basis points (bps) sequentially but down 231 bps from the year-ago quarter. The sequential increase was attributed to slightly higher revenues.
ON Semiconductor incurred operating expenses of $195.8 million, down 2.3% from $200.4 million in the previous quarter but up 13.1% from $173.1 million in the year-ago quarter. The company reported an operating margin of 12.3% versus 14.0% in the year-ago period and 11.5% in the previous quarter. Slightly higher gross margin and lower operating expenses sequentially were the primary reasons for the increase in non-GAAP operating margin this quarter.
Net Profit
On a pro-forma basis, ON Semiconductor reported net income of $95.4 million or 22 cents per share compared with $87.1 million or 20 cents in the previous quarter and $95.8 million or 22 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 income of $50.7 million or 12 cents per share compared with a net income of $55.1 million or 13 cents per share in the previous quarter and $94.1 million or 21 cents in the year-ago quarter.
Balance Sheet
Cash and short-term investments balance was $577.9 million at quarter-end versus $429.4 million in the prior quarter. Inventories were $743.0 million versus $746.9 million in the previous quarter.
At the end of this quarter, ON Semiconductor days of inventory on hand were 118 days, down approximately one day from the prior quarter.
At quarter-end, ON Semiconductor had $822.3 million of long term debt. Cash flow from operations was 101.6 million.
The company repurchased 10.4 million shares worth $131.0 million.
Guidance
ON Semiconductor expects third-quarter revenues in the range of $890.0–$930.0 million, with the mid-point being $910.0 million. The Zacks Consensus Estimate is pegged at $912.0 million.
Gross margin is expected in the 34.0%–36.0% range both on a GAAP and a non-GAAP basis. Operating expenses, on a GAAP basis, are expected within $232.0 million–$244.0 million, and $197.0 million–$207.0 million on a non-GAAP basis. The company also expects other income/expense within $8.0–$10.0 million, both on a GAAP and a non-GAAP basis.
Taxes are expected within $8 million–$12 million on a GAAP basis and $5 million–$8 million on a non-GAAP basis, with share count of 430.0 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’s bottom line matched our expectations while the top line missed the same.
The company witnessed continued strength in orders in the reported quarter and expects the momentum to continue in the near- to mid-term based on a solid design win pipeline. The strengthening of the U.S dollar and macroeconomic headwinds are expected to moderately affect revenues as the company is naturally hedged due to its broad based business.
Going forward, the company expects to gain increasing traction with image sensors in the automotive market. ON has high penetration with image sensors in the rear view camera market at the OEM level in North America, Japan and Korea. Strong sales of light trucks in North America was a major plus point.
The company has an attractive product portfolio and an outstanding manufacturing and operational organization. Currently it is streamlining its costs. So leveraging these assets will help the company to drive revenue growth and strong cash flow.
The company expects higher sales in the fastest growing applications within Automotive. These include automotive cameras, ADAS, door electronics, park assist, LED lighting, advanced ignition systems and engine control.
The end-market demand trends remain favorable. Management expects all the end markets to increase sequentially in the second quarter, except industrial, which it expects to be down.
ON Semiconductor has a Zacks Rank #3 (Hold).
However, some better-ranked stocks include PetMed Express, Inc. PETS and Amazon.com Inc. AMZN. Both of them hold a Zacks Rank #1 (Strong Buy).
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