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ON Semiconductor (ONNN - Analyst Report) reported first-quarter 2013 earnings of 10 cents, beating the Zacks Consensus Estimate by 2 cents or 25.0%.

Revenues

ON Semi reported revenues of $661.0 million, down 2.8% sequentially and 11.2% year over year.

Europe was the only region that grew in the last quarter.  ON Semi’s revenues from Asia (including Japan) accounted for 69% of the total revenue, while America generated 16% of the total revenue and Europe contributed 15%.

Revenues by End Market

Automotive brought in 28% of the total revenue. Segment revenues were up 4.7% on a sequential basis. ON Semi witnessed growth in both North American and Chinese vehicle markets and worldwide luxury light vehicle sales. Further, strong demand in their in-vehicle networking products such as CAN and LIN transceivers, body electronics, safety systems, infotainment and power train fuelled the growth.

ON Semi has been winning designs in powertrain, body, infotainment, power supplies and in-vehicle networking, contribution from which should grow as the electronic content in new vehicles continues to increase. ACISs, LED lighting, park assist and start-stop, and new braking applications are seeing strong demand.

Consumer generated 21% of the total revenue, down 7.2% sequentially.  Results in the last quarter were benefited from the recovery of white goods sales in China. Rise in adoption of SANYO inverter HIC solutions and intelligent power modules are also a positive for the future.

Computing generated 18% of the total revenue, down 7.9% sequentially. Management stated that the outperformance versus the market (estimated decline 12-14%) was driven by share gains and expressed optimism that share gains would increase further when Intel’s (INTC - Analyst Report) Haswell platform gained momentum in the second half of the year.

ON Semi continued its design wins in several areas such as hard disk drives, gaming, desktop and server markets with its mixed signal ASICs and MOSFETs.

Industrial/Military/Aerospace/Medical generated another 20% of the total revenue, up 8.0% from the prior quarter. Steady order flow and design wins drove the sequential growth. Residential and commercial building improvements in the U.S. and China are positives going forward.

Communications accounted for 13% of revenues, down 15.8% from the prior quarter. Normal seasonality and platform transition at an original equipment manufacturer (OEM) were the main reasons for the weakness in the first quarter. However, new design wins in upcoming smartphone models should drive solid double-digit growth for ON Semi in the second quarter.

Margins

GAAP gross margin for the quarter was 30.9%, flat sequentially and down 200 basis points (bps) from the year-ago quarter. Excluding the impact of pension-related expenses, the non-GAAP gross margin improved sequentially due to higher factory utilization at ON legacy operations despite the revenue decline.

Total operating expenses were $166.8 million, down 51.2% sequentially and 17.3% year over year. The contraction from the year-ago quarter was due to lower selling and marketing (S&M) and general and administrative (G&A) expenses as a percentage of sales. Increases in R&D expenses were the most significant.

Net Profit

On a pro forma basis, ON Semi reported a net income of $44.7 million or a 6.8% net income margin, compared with $37.0 million or 5.4% in the previous quarter and $57.5 million or 7.7% in the year-ago quarter. Our pro forma estimate for the last quarter excludes restructuring, intangibles amortization and other charges on a tax-adjusted basis but includes stock-based compensation. Our calculations may differ from management’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 $22.6 million or 5 cents per share compared to a loss of $138.2 million (31 cents per share) in the previous quarter and an income of $28.2 million or 6 cents per share in the year-ago quarter.

Balance Sheet

Inventories were down 3.5% to $561.4 million with inventory turns increasing from 3.2X to 3.3X in the first quarter. Days sales outstanding (DSOs) were around 51, up from around 48 in the previous quarter.

The cash and short-term investments balance was $614.3 million at quarter-end , with ON Semi generating $85.2 million from operations, spending around $39.0 million on capex and $77.5 million to retire its 1.875% senior subordinated convertible notes.  At quarter-end, ON Semi had $706.8 million of long-term debt on its balance sheet.

Guidance

ON Semi expects second-quarter revenues in the range of $675.0–$715.0 million. Both GAAP and non-GAAP gross margins are expected in the 32.5%–34.5% range. Operating expenses on a GAAP basis are expected to be $173.0–$183.0 million, while on a non-GAAP basis they are expected to be $158.0–$168.0 million. Backlog levels are estimated to be approximately 80.0%–85.0%. ON Semi also expects other income/expense of around $15.0 million on GAAP basis.

Taxes are expected to be $2.0–$4.0 million on both GAAP basis and non-GAAP basis, with the share count at 455.0 million.

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 also acquired additional capacity through the SANYO acquisition that should come in handy once demand picks up.

The end-market demand trends indicate strengthening computing and automotive markets, and steadier industrial and consumer markets. Improvement in SANYO is dependent on recovery in demand out of Asia markets, specially China and Japan and elimination of manufacturing issues.

ON Semi has a Zacks Rank #3 (Hold). Other semiconductor companies such as Advanced Semiconductor Engineering Inc. (ASX - Snapshot Report) and PLX Technology Inc. all have a Zacks Rank #1 (Strong Buy).

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