ON Semi Beats EPS, Revs Down Y/Y - Analyst Blog

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ON Semiconductor ( ONNN ) reported fourth quarter 2012 earnings of 8 cents, beating the Zacks Consensus Estimate by a penny.

Revenues

ON Semi reported revenues of $725.5 million, down 6.2% sequentially and 11.4% year over year.

Asia (including Japan) was the only region to witness growth.  ON Semi's revenues from Asia (including Japan) accounted for 71% of the total revenues, while America generated 16.0% of the total revenues and Europe contributed 13.0%.

Revenues by End Market

Automotive brought in 26.0% of revenues. Segment revenues were down 2.5% on a sequential basis. Management stated that the weakness in earnings was due to lingering economic concerns in Europe and inventory corrections across the world. . Further, a trade dispute between China and Japan hurt sales of Sanyo's automotive solutions.

ON Semi has been winning designs in powertrain, body, infotainment, power supplies and in-vehicle networking. Thus, management is confident that these will contribute significantly to revenues in the long term as the electronic content in new vehicles continues to increase. ACISs, LED lighting, park assist and start-stop, and new braking applications are witnessing strong demand.

Consumer generated 22.0% of revenues, down 14.1% sequentially.  Results in the last quarter were impacted by the white goods inventory glut in China, which management stated was showing an improving trend. Design wins on the handset side are also a positive for the future.

Computing generated 19.0% of revenues, down 10.9% sequentially. The SANYO side pulled down results in the last quarter, which management attributed to continued softness in the HDD market.

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. Management also witnessed continuing market share gain due to CPU power management solutions with Intel's ( INTC ) Ivy Bridge platform.

In addition, the company is witnessing a rising interest in its innovative Ultrabook with Microsoft's ( MSFT ) Windows 8, which is expected to ramp up through fiscal 2013. ON Semi was also successful with its thermal products and switching battery charger for Google's ( GOOG ) Android-based tablets.

Industrial/Military/Aerospace/Medical generated another 18.0% of revenues, down 6.2% from the prior quarter. Despite the current sluggishness in the market, demand is showing improving trends. Therefore, ON Semi expects a stronger second half of 2013.

Communications accounted for 15.0% of revenues and increased 8.2% from the prior quarter. ON Semi continues to drive penetration in the smartphone market, with design wins for its optical imaging, analog power management, protection and MOSFET solutions. 

Margins

The gross margin for the quarter was 30.9%, down 187 basis points (bps) sequentially and 22 bps from the year-ago quarter. The gross margin weakness was due to a lower factory utilization rate and lower-than-expected revenues in the last quarter.

Total operating expenses were $341.8 million, up 76.7% sequentially and 63.8% from the year-ago quarter. The expansion from the year-ago quarter was due to higher research and development (R&D), 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, followed by G&A.

Net Profit

On a pro forma basis, ON Semi reported a net income of $37.0 million or a 5.4% net income margin, compared with $53.5 million or 7.4% in the previous quarter and $58.4 million or 7.6% in the year-ago quarter.

Our pro forma estimate for the last quarter excludes restructuring and intangibles amortization 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 fully diluted GAAP basis, the company recorded net loss of $138.2 million (31 cents per share) compared to income of $12.5 million (3 cents per share) in the previous quarter and loss of $8.8 million (2 cents per share) in the year-ago quarter.

Balance Sheet

Inventories were down 9.7% to $581.7 million and inventory increased from 3.0X to 3.2X in the fourth quarter. Days sales outstanding (DSOs) were around 48, down from around 52 in the previous quarter.

The cash and short-term investments balance was $631.7 million at quarter-end , with ON Semi generating $136.6 million from operations and spending around $58.0 million on capex.

At quarter-end, ON Semi had $658.3 million of long-term debt on its balance sheet. Including both short and long-term debt, the net debt position at quarter-end was $380.2 million, down from a net debt position of $420.4 million in the third quarter.

Guidance

ON Semi expects first quarter revenues in a range of $645.0-685.0 million. Both GAAP and non-GAAP gross margins are expected to be in the 30.5-32.5% range.

Operating expenses on a GAAP basis are expected to be $212.0-$222.0 million, while on a non-GAAP basis they are expected to be $157.0-$167.0 million. Backlog levels are estimated to be approximately 80.0%-85.0%. ON Semi also expects other income/expense of around $10.0 million on both GAAP and non-GAAP basis.

Taxes are expected to be $2.0-$4.0 million on both GAAP basis and non-GAAP basis, with fully diluted share count at 450.0 million. Convertible notes, non-cash interest expense is expected to be $3.0 million on a GAAP basis. In addition, stock-based compensation expense is projected to be $6.0-$8.0 million in the first quarter of 2013.

Conclusion

ON Semi remains a good company with a well-diversified business and an end-market focus that would typically generate relatively steady revenues through 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 elimination of manufacturing issues.

ON Semi has a Zacks Rank #2 (Buy).



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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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