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ON Semiconductor (ON) Q3 Earnings Top Estimates, Decline Y/Y

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ON Semiconductor Corporation (ON - Free Report) reported third-quarter 2020 non-GAAP earnings of 27 cents per share, which comfortably surpassed the Zacks Consensus Estimate by 42.1%. However, the figure declined 18.2% from the year-ago quarter’s level.

Revenues of $1.317 billion declined 5% on a year-over-year basis. The slowdown in macroeconomic activity across the world due to COVID-19 caused the plunge. The Zacks Consensus Estimate for revenues was pegged at $1.267 billion.

ON Semiconductor intends to expand margins by streamlining its manufacturing footprint and accelerate the timeline for production with investments in the 300mm fab in east Fishkill. In the third quarter, management noted that it earned its first revenues from the 300mm products.  Moreover, it is holding talks with potential buyers to offload its six-inch fab located in Niigata, Japan and other fab facility located in Belgium.

Top-Line Details

Business Units Metrics:

ON Semiconductor has three business units — Power Solutions Group (revenues of $647.4 million), Advanced Solutions Group (revenues of $494.6 million) and Intelligent Sensing Group (revenues of $175.3 million).

End-Market Metrics:

Automotive (32% of revenues) end-market revenues were $419.2 million, down 6% year over year. The decline was caused by underutilization of automotive factories globally due to COVID-19.   

Nevertheless, management noted that the automotive sector is gradually recovering. It expects the recovery to continue in the near term.

Markedly, 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 semiconductor is also witnessing increasing demand for its LiDAR solutions along with ultrasonic, lighting, and actuator offerings.

Industrial/Medical/Mil-Aero (25%) end-market revenues declined 7% year over year to $327.6 million due to coronavirus crisis-induced sluggishness in industrial activity and supply chain disruptions along with customer specific issues owing to geopolitical issues.

Nevertheless, management noted strong traction for SiC products utilized in industrial power applications.

Moreover, the company is optimistic about the upcoming Energy efficiency regulations in 2021 and credits these regulations as the factor behind higher design activities for motor control and building automation. ON Semiconductor also secured design wins for professional movie camera applications and large format image sensors.

Communications (19%) end-market revenues declined 7% year over year to $255.4 million due to weakness in smartphone business, which offset growth in the 5G infrastructure business.

Computing (13%) end-market revenues increased 12% year over year to $172.2 million, courtesy of strong client and server business.

Consumer (11%) end-market revenues came in at $142.9 million. The figure declined 9% 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 33.5% contracted 230 basis points (bps) on a year-over-year basis. Per management, the decline was caused by lower revenues and additional costs due to COVID-19.

Non-GAAP operating expenses dropped 9.8% from the year-ago quarter’s figure to $283.6 million due to restructuring and cost containment measures. 

Non-GAAP operating margin contracted 100 bps on a year-over-year basis to 12%, owing to lower gross margin.

Balance Sheet & Cash Flow

As of Oct 2, 2020, ON Semiconductor had cash and cash equivalents of $1.65 billion compared with $2.06 billion as of Jul 3, 2020.

In the third quarter, the company had total debt (including current portion) of $4.24 billion, compared with $4.74 billion in the last reported quarter.

During the reported quarter, cash from operations came in at $163.4 million compared with the prior-quarter’s figure of $154.5 million.

Free cash flow came in at $101.8 million compared with $81.2 million in the previous quarter.

Guidance

For fourth-quarter 2020, ON Semiconductor projects revenues in the range of $1.3-$1.4 billion. The Zacks Consensus Estimate is currently pegged at $1.31 billion, which indicates a decline of 6.7% from the year-ago quarter’s figure.

Management expects revenues from Automotive end-market to increase sequentially in the fourth quarter, driven by uptick in global automotive production.

Revenues from Industrial end-market are anticipated to improve on a quarter-over-quarter basis. Meanwhile, Communications end-market revenues are anticipated to remain unchanged or decline sequentially in the fourth quarter due to certain clients and geopolitical factors.

Consumer end-markets revenues are expected to increase in the fourth quarter. Also, revenues from Computing end-market is expected to increase on strength in client and server verticals.

For the fourth quarter, non-GAAP gross margin is projected in the range of 32.9-34.9%. Non-GAAP operating expenses are expected in the range of $283-$297 million.

Zacks Rank & Stocks to Consider

Currently, ON Semiconductor carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the broader technology sector are Qorvo (QRVO - Free Report) , Marchex (MCHX - Free Report) and Everbridge (EVBG - Free Report) . All carry a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.

Marchex and Qorvo scheduled to report earnings on Nov 4, while Everbridge is set to release quarterly results on Nov 5.

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