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ON Semi's (ON) Earnings Doubled in Q1, Revenues Up Y/Y

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ON Semiconductor (ON - Free Report) posted first-quarter 2017 reported earnings of 18 cents per share that doubled on a year-over-year basis. However, the figure declined from 26 cents reported in the previous quarter.

The Zacks Consensus Estimate was pegged at 26 cents per share.

Moreover, ON Semi reported non-GAAP revenues of $1.28 billion, which surged 56.8% from the year-ago quarter and 1.6% from the previous quarter. The figure was better than management’s guided range of $1.215–$1.265 billion.
 

ON Semiconductor Corporation Price, Consensus and EPS Surprise

 

ON Semiconductor Corporation Price, Consensus and EPS Surprise | ON Semiconductor Corporation Quote

 

The year-over-year growth was driven by strong progress of the Fairchild integration and improving automotive, industrial and communications end-markets.

We note that ON Semi has outperformed the Zacks Semiconductor – Analog & Mixed industry on a year-to-date basis. The stock gained 13.1% as compared with industry’s 9.6%. The company’s diversified product and customer base along with improving end-markets will aid the stock sustain momentum in the rest of 2017.



Revenue Details

ON Semi has three business units namely – Power Solutions Group or PSG (revenues of $636 million), Analog Solutions (revenues of $462 million) and Image Sensor Group (revenues of $184 million).

Automotive (32% of revenues) end-market revenues were approximately $405 million, up 28% year over year and almost 10% quarter over quarter. In the quarter, the company’s image sensor revenues related to advanced driver-assistance systems (ADAS) and viewing applications grew at an impressive high-teen percentage rate sequentially.

Management noted that growth drivers for automotive applications include LED lighting, power management, power discretes, body electronics, in-vehicle networking solutions and powertrain ASICs.

Industrial (25%) end-market revenues increased 64% year over year and 6% sequentially to $320 million. The company noted that its Python line of CMOS image sensors for machine vision applications continues to grow at an impressive rate.

Communications (19%) end-market revenues grew 75% year over year but declined almost 14% quarter over quarter to $243 million, due to seasonality and softness in the Chinese handset market.

Computing (10%) grew 70% year over year and 1% quarter over quarter to $130 million. On Semi won designs for power stage for cloud computing and server applications. The company anticipates revenues from these wins to start contributing in the near-to-mid-term.

Consumer (14%) end-market revenues almost doubled on a year-over-year basis and grew approximately 1% sequentially to $184 million.

Margins

Non GAAP gross margin was 35.4%, up 30 basis points (bps) sequentially and 170 bps year over year, reflecting higher-than-expected revenues and improving operational efficiency.

ON Semi incurred non-GAAP operating expenses of $284.9 million, up 50.6% from the year-ago quarter but down 1% from the previous quarter. The figure was towards the high-end of management’s guided range $271–$285 million, primarily owing to higher variable compensation resulting from higher sales and investments in ADAS related strategic growth initiatives such as automotive radar and advanced image sensors.

As percentage of revenues, operating expenses declined 330 bps from the year-ago quarter and 300 bps from the previous quarter to 19.8%.
 
As a result, non-GAAP operating margin expanded 120 bps from the year-ago quarter to 11.8%. However, operating margin contracted 50 bps on a sequential basis, reflecting lower gross margin base.

Balance Sheet

Cash & cash equivalents were $729 million, down $299 million sequentially. In the first quarter, operating cash flow was approximately $209 million as compared with $229 million in the previous quarter. Free cash flow was $156 million, down from $179 million in the previous quarter.

Guidance

ON Semi now expects to exit 2017 with annual synergies run rate of $180 million, as compared with its earlier target of $160 million from the Fairchild acquisition. The company also raised annualized synergies run rate exiting 2018 to $220 million from $200 million. Total annual synergies from Fairchild are now anticipated to be $245 million, up from $225 million, which it expects to achieve by end of 2019.

Management expects to see strong growth in revenue contribution from Fairchild in near to mid-term. All the end-market revenues are anticipated to increase on a quarter-over-quarter basis in second-quarter 2017.

ON Semi believes that global automotive units should grow by low-single digit percentage annual rate in 2017. Moreover, management expects Industrial end-market to benefit from strong defense related revenues as “depleted military stocks are being replenished”.

ON Semi now forecasts revenues to be in the range of $1.285–$1.335 billion in second-quarter 2017. Non-GAAP gross margin are projected to be in the range of approximately 34.7–36.7%, while operating expenses of approximately $281–$295 million.
Management now expects growth in operating expenses as a percentage of revenues to decline in the latter half of the second quarter, much closer toward the company’s target model (21%).

On Semi expects free cash flow in the range of $500–$600 million for 2017.

Conclusion

We believe that the improving end-markets are positive for ON Semi. The Fairchild acquisition has helped the company to grab a dominant position in the power semiconductor market with a planned focus on smartphone, automotive and industrial end markets.

We note that automotive present significant growth prospects given strong demand for ADAS related applications. Moreover, the company’s plan to sell products (like power modules) from consumer end-market to industrial applications end-market will boost margins and revenues in the long term.

Additionally, higher synergies from the Fairchild acquisition along with improving operating leverage will boost profitability.

Zacks Rank & Other Key Picks

Currently, On Semi carries a Zacks Rank #2 (Buy). Analog Devices (ADI - Free Report) , Applied Optoelectronics, (AAOI - Free Report) and Micron Technology (MU - Free Report) sporting Zacks Rank #1 (Strong Buy) are other top ranked stocks in the broader technology sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

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