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ON Semiconductor (ON) Misses on Q3 Earnings & Revenues

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ON Semiconductor (ON - Free Report) reported third-quarter 2016 non-GAAP earnings of 23 cents that missed the Zacks Consensus Estimate by a penny but remained flat on a year-over-year basis.

Revenues

ON Semiconductor reported revenues of $950.9 million, up 8.3% sequentially and 5.2% year over year. However, revenues missed the Zacks Consensus Estimate of $956 million.

Revenue growth in the quarter was driven by accelerating momentum in the automotive and industrial markets. Also, demand for mobile devices remained strong.

Revenues by End Market

Automotive accounted for 33% of total revenue. Segment revenues were negatively impacted by divestiture of the Ignition IGBT business, TVS diodes and Thyristor product lines. The company’s automotive design funnel remains robust given strong demand for semiconductors in light vehicles. The company continues to foresee strong demand for image sensors for ADAS applications going ahead.

Additionally, advanced front lighting, park assist and DC-to-DC conversion are the other applications that are driving growth for the company. Moreover, with the inclusion of Fairchild, On Semiconductor has positioned itself to benefit from the fast-growing EV/HEV market.

The Industrial market, which includes Military/Aerospace/Medical, contributed 22% to total revenue. Growth was driven by strength in security cameras, machine vision, medical, and general lighting related applications. Additionally, the company continues to maintain its stronghold in the hearing health market and is on track to launch new products in the fourth-quarter.

Communications (both networking and wireless) accounted for 20% of revenues backed by strong momentum in the smartphone market coupled with improving position with key global and China based original equipment manufacturers.

Consumer brought in 12% of total revenue. The white goods market posted strong growth in the third quarter. Also, demand for gaming consoles led to an upside.

Likewise, Computing generated 12% of total revenue. A slowdown was observed in the computing market due to inventory adjustment.

ON SEMICON CORP Price, Consensus and EPS Surprise

Margins

Pro forma gross margin was 34.6%, down 48 basis points (bps) sequentially but up 48 bps year over year. The increase was largely driven by higher utilization rates, higher revenues and an improved product mix.

ON Semiconductor incurred operating expenses of $233.8 million, up 17.1% from the previous quarter and 15.8% from the year-ago quarter. The company reported operating margin of 10.0%, down 231 bps sequentially and 178 bps year over year.

Balance Sheet

Cash and short-term investments balance was $880.5 million at the end of the quarter compared with $588.1 million in the prior quarter. Inventories increased to $1083.1 million from $750.2 million in the previous quarter.

At the end of the reported quarter, ON Semiconductor had $3.1 billion in long-term debt compared with $2.9billion in the prior quarter.

The company spent $35.9 million cash for the purchase of capital equipment while $223.6 million was used for the repayment of long-term debt in capital leases.

Guidance

ON Semiconductor expects fourth-quarter revenues in the range of $1.1 billion to $1.2 billion. The Zacks Consensus Estimate is pegged at $1.2 billion.

Non-GAAP gross margin is expected in the 33.6% to 35.6% range, while GAAP gross margin is expected in the 27.4% to 29.5% range. Operating expenses, on a GAAP basis, are expected within $327 million to $359 million, and within $273 million to $287 million on a non-GAAP basis. The company also expects other net income/expense within $34 million to $36 million, on a non-GAAP basis with a share count of 424.0 million.

Conclusion

ON Semiconductor has a well-diversified business and an end-market focus that would typically generate relatively steady revenues throughout the year. Although the company reported a decent quarter, both the top and bottom lines missed our expectations.

The company witnessed continued strength in orders in the reported quarter and expects the momentum to continue in the near-to-mid term based on a solid design-win pipeline.

Though macroeconomic conditions remain weak, the end-market demand trend is favorable due to seasonality.

During the quarter, the company completed the acquisition of Fairchild. The acquisition is expected to propel On Semiconductor toward a leadership position in the power semiconductor space diversified across manifold markets with a planned focus on smartphone, automotive and industrial end markets.

The company has an attractive product portfolio. Currently, it is streamlining its costs, which, in addition to its assets, will boost revenues and cash flow.

Zacks Rank & Key Picks

On Semiconductor has a Zacks Rank #2 (Buy).

Some better-ranked stocks in the broader technology space are Acacia Communications, Inc. (ACIA - Free Report) , Advanced Energy Industries, Inc. (AEIS - Free Report) and Amkor Technology, Inc. (AMKR - Free Report) , all sporting aZacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Notably, the consensus estimate for Acacia’s current year has been revised upward to $2.28 over the last seven days.

Similarly, the consensus estimate for Advanced Energy has been revised upward to $2.67 over the last seven days.

Lastly, the consensus estimate for Amkor has been revised upward to 53 cents over the last seven days.

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