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ON Semiconductor Corp. (ON) Up 26.2% Since Last Earnings Report: Can It Continue?

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Zacks Equity Research
·6-min read
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It has been about a month since the last earnings report for ON Semiconductor Corp. (ON). Shares have added about 26.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is ON Semiconductor Corp. due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

ON Semiconductor Q1 Earnings Miss Estimates, Down Y/Y

ON Semiconductor Corporation reported first-quarter 2020 non-GAAP earnings of 10 cents per share, which lagged the Zacks Consensus Estimate by 33.3%. Notably, the figure declined 76.7% from the year-ago quarter’s level.

Revenues of $1.278 billion declined 7.8% on a year-over-year basis. Supply chain disruptions and fall in demand due to COVID-19 induced lockdowns caused the downtick.

The company intends to expand margins by enhancing manufacturing footprint and accelerate the timeline for production with investments in the 300mm fab in east Fishkill. Moreover, it is undertaking measures like reduction in executive salaries and board member compensation to maintain liquidity in this time of crisis.

Top-Line Details

Business Units Metrics:

ON Semiconductor has three business units — Power Solutions Group (revenues of $624 million), Analog Solutions Group (revenues of $467 million) and Image Sensor Group (revenues of $187 million).

End-Market Metrics:

Automotive (34% of revenues) end-market revenues were approximately $439 million, down 6% year over year. The decline was caused by closure of automotive factories globally and disruption in supply chain due to COVID-19.    

Notably, management noted weakness in China earlier in the quarter but there has been a slight recovery as factories started to reopen. Moreover, there is significant weakness in U.S. and European markets.

However, 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. ON secured a design win for ADAS image sensors with a major Japanese OEM during the first quarter.

Moreover, the company witnessed strong traction for its silicon carbide (SiC) and silicon power products driven by growth in electric vehicles (EVs). Extension of subsidies for electric vehicles in China till 2022 also bodes well for its silicon carbide and IGBT business.

Industrial/Medical/Mil-Aero (25%) end-market revenues declined 12% year over year to $315 million, thanks to fall in global industrial activity and supply chain disruptions due to COVID-19.

Nevertheless, the company is witnessing strong demand for SiC modules, which holds promise. During the first quarter, the company witnessed a design win for its high-voltage super-junction MOSFETs for EV charging stations.

In the medical end-market, the company is taking measures to support higher COVID-19 induced demand for components of medical equipment like ventilators, infusion pumps, patient monitoring systems and cardiac assist systems.

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%) end-market revenues declined 1% year over year to $254 million due to sluggishness in the smartphone business. However, the company witnessed robust growth in the 5G infrastructure business.

Computing (11%) declined 7% year over year to $136 million due to the company’s selective participation in the client-related business. On Semiconductor witnessed robust momentum in the server business as companies are enhancing their IT infrastructure to support the growing work-from-home trend.

Consumer (10%) end-market revenues came in at $134 million. The figure declined 17% from the year-ago quarter’s level, primarily due to softness in consumer electronics stemming from COVID-19.

Margins in Detail

Non-GAAP gross margin of 31.5% contracted 550 basis points (bps) on a year-over-year basis. Management attributes the decline to lower revenues and lower level of factory utilization.

Non-GAAP operating expenses increased 6.7% from the year-ago quarter’s figure to $318.7 million, driven by costs pertaining to the acquisition of Quantenna. As a percentage of revenues, the figure expanded 250 bps on a year-over-year basis to 24.9%.

Non-GAAP operating margin contracted 890 bps on a year-over-year basis to 6.6%, owing to lower gross margin.

Balance Sheet & Cash Flow

As of Apr 3, 2020, ON Semiconductor had cash and cash equivalents of $1.982 billion, compared with $894.2 million as of Dec 31, 2019.

In the first quarter, the company had total debt (including current portion) of $4.733 billion, up from $3.613 billion in the last reported quarter.

During the reported quarter, cash from operations came in at $166 million compared with the prior-quarter’s figure of $91.7 million.

Free cash flow came in at $33.7 million compared with $20.7 million free cash outflow in the previous quarter.

Guidance

For second-quarter 2020, ON Semiconductor projects revenues in the range of $1.10-$1.26 billion.

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

For the second quarter, non-GAAP gross margin is projected in the range of 29-31%. Non-GAAP operating expenses are expected in the range of $297-$313 million.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -78.31% due to these changes.

VGM Scores

At this time, ON Semiconductor Corp. has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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. Notably, ON Semiconductor Corp. has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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