ON Semiconductor Corporation ON delivered second-quarter 2018 non-GAAP earnings of 46 cents per share beating the Zacks Consensus Estimate by a penny. Further, the figure increased 27.8% year over year and 15% sequentially.
The company reported revenues of $1.46 billion, which increased 9% year over year from the year-ago quarter’s level of $1.34 billion and also surpassed the Zacks Consensus Estimate of $1.43 billion. Moreover, the figure was toward the upper end of management’s guided range of $1.405-$1.455 billion.
Moreover, on a sequential basis revenues increased 5.7% year over year.
Robust demand, adoption and favorable product mix of the company’s diversified product portfolio drove year-over-year growth. The company continues to gain from its strength in automotive and industrial end-markets.
ON Semiconductor Corporation Price and Consensus
ON Semiconductor Corporation Price and Consensus | ON Semiconductor Corporation Quote
Revenue Details
Business Units Metrics:
ON Semiconductor has three business units namely — Power Solutions Group or PSG (revenues of $748.2 million), Analog Solutions (revenues of $513.2 million) and Intelligent Sensing Group (revenues of $194.5 million).
End-Market Metrics:
Automotive (31% of revenues) end-market revenues were approximately $454.1 million, up 10% year over year. In the 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.
The company holds a competitive edge over its peers in 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 (28%) end-market revenues increased 14% year over year to $401.7 million. Solid demand for a broad range of power products aided growth. Demand in industrial end-markets was further driven by power modules, image sensors, machine vision as well as favorable macroeconomic conditions.
The addition of Fairchild’s offerings has made its product portfolio lucrative. Moreover, the company is in the process of launching a new platform of products providing higher efficiency to access a wider range of the industrial markets.
Communications (17%) end-market revenues dipped 3% year over year to $249.4 million. The decline can primarily be attributed to a slowdown witnessed in smart-phone market, partially mitigated by the company’s penetration in key global markets. New platforms as well as increased adoption of its content on major platforms aided ON Semiconductor to minimize the impact of the decline.
Computing (10%) grew 17% year over year to $147.3 million, thanks to the ramp in cloud and server solutions segments and a favorable client PC market.
Consumer (14%) end-market revenues grew 7% on a year-over-year basis to $203.3 million. Better-than-expected growth in white goods drove year-over-year segmental revenue growth.
Operating Details
Non-GAAP gross margin was 38.1%, up 50 basis points (bps) sequentially and 120 bps on a year-over-year basis driven by improvement in operational efficiency. Moreover, strengthened product mix and improved contribution from the higher-margined industrial, server and automotive segments positively impacted gross margins. Management expects mix improvement, portfolio optimization and manufacturing synergies from the acquisition of Fairchild to further drive margins.
Non-GAAP operating expenses for the second quarter came in at $31.7.6 million as compared with $296.9 million reported in the year-ago period and $300.7 million in the previous quarter.
Non-GAAP operating margin was 16.3%, reflecting a year-over-year and sequential increase of 160 bps and 60 bps, respectively.
Balance Sheet
Cash & cash equivalents were $850.2 million, down from $924.9 million in the previous quarter. Total debt (long-term plus short term) came in at $2.77 billion.
In the second quarter, the company generated operating and free cash flow of $268.5 million and $115.6 million, respectively.
The company repurchased 1.7 million shares worth $40 million during the quarter.
Guidance
For the third quarter of 2018, ON Semiconductor forecasts revenues to be in the range of $1.485-$1.535 billion (mid-point $1.510 billion), given its booking trends, estimated turn level and backlog level. The Zacks Consensus Estimate for the quarter is pegged at $1.48 billion.
Automotive revenues are anticipated to remain strong backed by the impressive demand witnessed by image sensors for ADAS applications, and IGBTs for electric vehicle traction motors in China.
Furthermore, management expects silicon carbide (SiC) developments to generate revenues from second half of 2018 in the automotive end-market. Ramp of design wins led to impressive growth in LED lighting business, consequently bolstering the prospects of automotive lighting.
Industrial end-market revenues are projected to be down sequentially. However, management anticipates energy-efficient power modules to be a key catalyst in the long term for industrial end-market.
Management envisions Communications end market revenues to be up sequentially, primarily due to normal seasonality, increased content, and unveiling of new device models.
Revenues for computing end-market are projected to increase sequentially owing to a rise in seasonal demand and continued ramp in server business.
Management expects Server business to significantly contribute to computing end market in 2018. ON Semiconductor is engaging important cloud and server companies, and working on next generation platforms for leading CPU providers.
However, revenues in consumer end-market are anticipated to be up sequentially due to a rise in seasonal demand
Non-GAAP gross margin is projected to be in the range of approximately 38.1-39.1%.
Non-GAAP operating expenses are expected in the range of $319-$333 million. The company revealed that the sequential increase can be attributed to seasonality of stock-based compensation grant.
For full year 2018, management targets free cash flow generation of $800 million. It continues to expect margin expansion as well as free cash flow growth throughout 2018 driven by synergies from Fairchild acquisition and better product mix.
Conclusion
ON Semiconductor anticipates long-term growth backed by robust demand for products in the automotive and industrial end markets. Specifically, power management and imaging products which are gaining traction remain a key catalyst.
Moreover, integration and optimization of Fairchild’s manufacturing operations is anticipated to boost the company’s profitability.
The company is already enjoying cross-selling opportunities to a combined customer base that is aiding its top-line. Management also remains elated on improved customer engagement leading to long-term supply agreements. We believe these factors will help this Zacks Rank #2 (Buy) stock to improve its performance going forward.
Additionally, ON Semiconductor is likely to gain a competitive edge through increased investment in captive raw wafer manufacturing. Rising raw wafer prices will bolster the company’s margins in the long run.
Other Stocks to Consider
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Microsoft, CACI and Intel have a long-term earnings growth rate of 12.3%, 10% and 8.4%, respectively.
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