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ON Semiconductor's (ON) Q3 Earnings Up Y/Y, Revenues Beat

ON Semiconductor Corporation ON reported third-quarter 2017 GAAP earnings of 25 cents per share, much higher than the year-ago earnings of 2 cents per share. Earnings increased 14% sequentially.

The Zacks Consensus Estimate was pegged at 40 cents per share.

The company reported non-GAAP revenues of $1.39 billion, which surged 46% year over year and 4% from the previous quarter. Revenues beat the Zacks Consensus Estimate of $1.37 billion. The figure was in line with the upper end of the guided range of $1.34-$1.39 billion.

The year-over-year growth was driven by strong demand and adoption of the company’s diversified product portfolio for automotive, industrial and communications end-markets. Management is particularly positive about the strong operating model followed by ON Semi.

Shares of ON Semi have gained 67.8% year to date, significantly outperforming the industry’s 28.6% rally.

 

Revenue Details

ON Semi has three business units namely – Power Solutions Group or PSG (revenues of $706 million), Analog Solutions (revenues of $492 million) and Image Sensor Group (revenues of $193 million).

Automotive (30% of revenues) end-market revenues were approximately $411 million, up 30% year over year and were almost flat quarter over quarter. In the quarter, the company’s CMOS image sensors, power management products, mixed signal ASICs and sensor interface products witnessed strong demand.

Industrial (25%) end-market revenues increased 51% year over year and 1% sequentially to $349 million. The company noted that its Python line of products for machine vision applications continues to grow at an impressive rate.

Demand in industrial end-markets was driven by power modules and power management semiconductor solutions for industrial applications. The addition of Fairchild’s offerings to its product portfolio has made it further lucrative. Management expects the growth trend in this market segment primarily driven by the requirement of higher energy efficient products and automation related products to boost its market share.

Communications (20%) end-market revenues grew 50% year over year and 9% quarter over quarter to $282 million. The company exited the mobile image sensor market during the second quarter. However, new platforms and increased adoption of the company’s content on major platforms offset the negative impact of the exit. Management is optimistic about the acceptance of USB Type-C solutions in the smartphone market.

Computing (11%) grew 58% year over year and 16% quarter over quarter to $157 million, pertaining to the impressive performance of client and server solutions segments. Consumer (14%) end-market revenues grew 59% on a year-over-year basis and approximately 2% sequentially to $192 million. Strong performance of white goods consisting of heavy consumer durables contributed to segment revenues.

ON Semiconductor Corporation Price, Consensus and EPS Surprise

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

Margins

Non-GAAP gross margin was 37.9%, up 100 basis points (bps) sequentially and 205 bps year over year, backed by revenue growth and improved operational efficiency. A favorable product mix also boosted margins.

Non-GAAP operating margin was 16.6%, reflecting a sequential increase of 190 bps and a ear-over-year increase of 370 bps.

Balance Sheet

Cash & cash equivalents were $901.2 million, up from $871.6 in the previous quarter. In the third quarter, operating cash flow was $328 million compared with $333.2 million in the previous quarter. Free cash flow was $238 million, down from $264.2 million in the previous quarter.

Guidance

ON Semi reiterated its annual synergies run rate from the Fairchild acquisition to be $180 million. The company targets annual synergy rate of $240 million from the acquisition by the end of 2019.

Management expects to see strong growth in revenue contribution from Fairchild in the near to mid-term. In the fourth-quarter, automotive revenues are expected to increase sequentially backed by the ramp up of IGBTs for electric vehicle traction motors in China. Revenues from industrial, computing, consumer and communications end markets are however expected to go down sequentially due to seasonality.

ON Semi now forecasts revenues to be in the range of $1.33–$1.38 billion in fourth-quarter 2017. Non-GAAP gross margin is projected to be in the range of approximately 36.8%–38.3%, while non-GAAP operating expenses are expected in the range of $294–$308 million.

For 2017, On Semi now expects free cash flow of around $700 million, up from the prior guidance of $600–$650 million.

Conclusion

ON Semi is benefiting from a diversified customer base as none of the end markets generate more than 5% of the revenues, thus lowering the risk of customer concentration.

Divestiture of non-core and underperforming business segments are also proving to be beneficial for the company’s margins. The company anticipates consistent growth backed by high-margin products meant for the automotive and industrial end markets. Additionally, per management, past investments in the automotive, industrial and communications end markets are also reaping benefits.

Moreover, integration and optimization of Fairchild’s manufacturing operations is anticipated to further boost the company’s profitability. Most recently, the company integrated Fairchild’s IT systems. The company is already enjoying cross-selling opportunities to a combined customer base that is aiding its top line and we believe this will help in improving its performance going forward.

Zacks Rank & Stocks to Consider

ON Semiconductor carries Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Better-ranked stocks in the broader technology sector include Adobe Systems Incorporated ADBE, Fair Isaac Corporation FICO and Autohome Inc. ATHM, all sporting a Zacks Rank #1.

Long-term earnings growth rate for Adobe, Fair Isaac and Autohome is projected to be 17%, 10% and 18.8%, respectively.

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