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ON Semiconductor (ONNN - Analyst Report) reported first-quarter 2014 earnings of 17 cents, exceeding the Zacks Consensus Estimate by 2 cents.

Revenues

ON Semi reported revenues of $706.5 million, down 0.4% sequentially but up 6.9% year over year. Reported revenues were at the lower end of the company’s expected range of $695.0–$725.0 million and below the Zacks Consensus Estimate of $712.0 million.

Revenues by End Market

Automotive brought in 30% of the total revenue. Segment revenues were up 5.0% on a sequential basis. The growth was driven by strength across all product lines, especially ignition IGBT's, LED drivers, motor control IC's for advanced front lighting systems, in-vehicle networking products, slow regulators and switch mode power supplies.

ON Semi’s design wins in front-lighting applications, powertrain, body, infotainment, power supplies and in-vehicle networking are expected to contribute significantly as electronic content in new vehicles continues to increase. The company has secured many auto design wins in Europe, America, Korea and Japan in the last quarter which are expected to contribute to revenues in the near future.

Consumer generated 17% of the total revenue, down 14.0% sequentially. Results in the quarter were down due to normal seasonality, seasonal production decline for gaming systems, digital media players and LCD televisions.

ON Semi 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.

Computing generated 15% of the total revenue, down 5% sequentially due to normal seasonality.

Though ON Semi continues to win designs in several areas such as Vcore controller, motherboards and AMD computing platforms which should ramp during the year, it expects revenues to be down sequentially.

Industrial/Military/Aerospace/Medical generated another 21% of total revenue, up 8.0% from the prior quarter. The increase was due to strength in certain areas of military, medical and aerospace business. Also, design wins in the company’s flagship Ezairo 7100 DSP aided the revenue growth.

Design wins in application-specific integrated circuits (ASICs) for both medical and military/aerospace applications, onshore military programs in the United States and hearing health and audiology products are gaining momentum.

Communications accounted for 17% of revenues but were down 6.0% from the prior quarter due to normal seasonality. However, revenues were up 7% year over year driven by new product introductions and design wins in the smartphone market.

ON Semi continues to gain market share in various products such as battery protection, battery chargers, protection devices, filtering and power management ICs. Management expects this segment to be slightly up sequentially in the second quarter.

Margins

The GAAP gross margin for the quarter was 35.5%, up 30 basis points (bps) sequentially and 460 bps from the year-ago quarter. The increase was driven by improved mix, resulting from strong growth in higher margin industrial and automotive businesses.

ON Semi reported GAAP operating expenses of $177.5 million, up 6.4% from $166.8 million incurred in the year-ago quarter. As a percentage of sales, research & development expenses decreased from the year-ago quarter, while general & administrative, and selling & marketing expenses increased from the year-ago quarter. The net result was a GAAP operating margin of 10.4% versus 5.7% in the year-ago quarter.

Net Profit

On a pro-forma basis, ON Semi reported net income of $75.2 million or 17 cents per share compared with $74.3 million or 17 cents in the previous quarter and $44.7 million or 10 cents per share 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 $58.4 million or 13 cents per share compared with $28.7 million or 6 cents in the previous quarter and $22.6 million or 5 cents per share in the year-ago quarter

Balance Sheet

The cash and short-term investments balance was $617.0 million at quarter-end versus $625.7million in the prior quarter. Trade receivables were$417.1 million, up from $383.4million in the prior quarter. Inventories were$613.9 million, up 0.3% sequentially.

At quarter-end, ON Semi had $920.2 million of total debt (long-term plus short-term) on its balance sheet, with debt equity ratio being 37.4%. Cash flow from operations was $74.9 million, with $48 million of cash spent on capex.

Management repurchased 2.2 million shares worth $19.0 million in the quarter at an average price of $9.12 per share.

Guidance

ON Semi expects second-quarter revenues in the range of $738.0–$768.0 million, the mid-point of $753.0 million being above the Zacks consensus estimate of $745.0 million. Gross margins are expected in the 34.7–36.6% range on a GAAP basis and within the 35.1–37.1% range on a non-GAAP basis. Operating expenses, on a GAAP basis, are expected within $179.0–$192.0 million, and within $168.0–$178.0 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 $9.0–$11.0 million on a GAAP basis and $6.0–$8.0 million on a non-GAAP basis, with share count at 444.0 million. Total capital expenditure is expected in the range of $50–$60 million for the second quarter of 2014.

Conclusion

ON Semi 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 the 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, consumer and automotive markets in the near term. However, the computing end market is expected to be down sequentially due to normal seasonality.

However, over the long term, ON Semi is well positioned for growth and market share gains in all its end markets. The company also acquired additional capacity through the SANYO acquisition that should come in handy once demand picks up. We expect the product launches and numerous design wins in communication, automotive and industrial markets to act as strong catalysts throughout 2014.

ON Semi has a Zacks Rank #2 (Buy). Other stocks that have been performing well and are worth a look include GrafTech International Ltd. (GTI - Snapshot Report), Siemens Aktiengesellschaft and IAC Interactive (IACI - Snapshot Report). While GrafTech International sports a Zacks Rank #1 (Strong Buy), Siemens and IAC Interactive carry the same Zacks Rank as On Semi.

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