ON Semiconductor (ONNN) reported strong revenue growth from the year-ago quarter, exceeding the Zacks Consensus Estimate for the quarter. The flooding in Thailand significantly impacted the company’s business in the quarter, but management stated that there would be a resumption in manufacturing activities in the fiscal second quarter.
In the meantime, ON Semi will continue to incur additional costs related to the shifting of production to other facilities and an additional $50 million in capex to restart operations in Thailand. Near-term charges for inventory destroyed may also be expected.
Revenue
ON Semi reported revenue of $767.9 million, down 14.5% sequentially and up 32.6% year over year. The significant increase from the year-ago quarter was mainly on account of additional revenues from SANYO Seiconductor, which was combined in the results from the first quarter of 2011. Including this contribution, revenue made it to the middle of management’s expectations of $740-780 million (down 13.1% to 17.6% sequentially).
ON Semi saw revenue declines across all geographies, with Asia declining the most and the Americas the least. Asia (including Japan) remained the largest contributor, accounting for 70% of total revenue and declining 16.9% sequentially. The Americas was next with a revenue share of 17%, having dropped 3.1% from the September 2011 quarter. Europe brought in the remaining 13% of revenue, declining 14.5%.
Revenue by End Market
ON Semi’s fourth quarter performance by end market is a little hard to determine, given the addition of SANYO’s business and the clubbing of medical/ Industrial/Military/Aerospace with Automotive, which started in the last quarter. However, management commentary remained positive, as all segments grew from the year-ago quarter. The sequential comparison was not so flattering, since all except the industrial/military/aerospace declined.
Following the acquisition, the consumer market emerged as the largest contributor of quarterly revenue. However, given the manufacturing issues in Thailand, the revenue share dropped to 23% in the last quarter. Revenue declined 29.8% sequentially and grew 90.6% from the year-ago quarter.
ON Semi previously stated that roughly half of the business acquired from SANYO catered to the consumer market, so this was the main reason for the significant increase from the year-ago quarter. However, the margins being softer, the negative impact on profits may be expected to continue.
Automotive brought in 23% of revenue, down 10.6% sequentially and up 38.6% year over year. The increase from last year was largely on account of SANYO. Although SANYO made a significant contribution to revenue, its business was impacted by the Thailand flooding in the last quarter.
Through the first half of 2012, ON Semi is expected to see strength in North America and the emerging markets. The increasing number of cars, the increasing use of electronics in the automotive sector, as well as increased adoption of ON Semi products, such as its parking assistance and position sensors remain longer-term drivers.
China is developing into an important market and ON Semi recently opened an engineering center in China, which is wise considering the fact that a significant percentage of automotive manufacturing has shifted to the region. Management stated that the company’s products were being well received in China.
Industrial/Military/Aerospace/Medical generated another 21% of revenue. The market strengthened for ON Semi in the last quarter, with revenue growing 5.6% sequentially 46.5% from the year-ago quarter. The convergence of connected building automation systems with energy efficient initiatives will continue to work in ON Semi’s favor, as will the increasing demand for wired communications over IP, embedded control, motor control, sensors, and lighting and imaging equipment.
Computing generated 18% of revenue, down 19.0% sequentially, but up 3.8% from a year ago. The sequential weakness was the result of broader market concerns that impacted most semicondutor players catering to the market. Power management, protection, audio and system interface design wins into more than 10 tablet platforms is encouraging.
Management has stated earlier that ON Semi had around $3.50 of addressable content for tablets, $8 for notebooks and $11 for desktops. Therefore, with notebooks getting cannibalized by tablets and tablet demand not meeting expectations, results are likely to remain weak in the near term.
Communications accounted for 15% of revenue, down 8.4% sequentially and up 24.3% year over year. The December quarter is a seasonally slower one for ON Semi although it continues to drive penetration in the smart phone market, seeking to gain from the grown in the area.
ON Semi can support a dollar content of $3.50 per smartphone. The company continues to introduce new products, which will augment the strength from increased penetration of its custom ASICs, precision clock and timing products, as well as infrastructure buildouts in China and India.
Revenue by Product Segment
ON Semi merged the Automotive & Power and Digital & Mixed Signal segments in the last quarter, with the combined segment auto/industrial/medical/military/aerospace contributing 29% to total revenue. The second largest segment was SANYO Semiconductor Products Group (28% of revenue in the last quarter, down 27.1% sequentially).
Standard Products, which generated 25% of revenue, was up 15.2% sequentially and down 100.0% from the year-ago quarter. Computing & Consumer brought the remaining 18%, up 6.0% sequentially and 3.8% from last year.
Margins
Gross margin for the quarter was 32.9%, down 216 basis points (bps) from the previous quarter’s 35.0%, impacted by the Thailand flooding.
The total operating expenses of $177.9 million were down 5.2% sequentially although up 37.6% from the year-ago quarter. The significant increase from the year-ago quarter was because of the addition of SANYO’s business.
The operating margin shrunk 444 bps sequentially and 919 bps from last year. The operating margin was aso impacted by the lower volumes. The lion’s share of the higher expenses were in cost of sales, although R&D also increased substantially from both the previous and year-ago quarters. Sales and marketing and G&A expenses on the other hand were sightly up on a sequential basis, but down year over year.
Net Profit
On a pro forma basis, ON Semi reported a net income of $52.4 million, or a 6.8% net income margin compared to $110.9 million, or 12.3% in the previous quarter and $88.3 million or 15.2% in the fourth quarter of last year.
Our pro forma estimate for the last quarter excludes inventory and other adjustments related to the SANYO acquisition, restructuring charges, intangibles amortization and loss on debt repurchase ad exchange on a tax adjusted basis but includes stock based compensation.
On a fully diluted GAAP basis, the company recorded a net loss of $7.8 million ($0.02 per share) compared to loss of $49.4 million ($0.11 per share) in the previous quarter and income of $61.0 million ($0.14 per share) in the prior-year quarter.
Balance Sheet
Inventories were down 9.8% and inventory turns went up from 3.3X to 3.2X. Days sales outstanding (DSOs) were around 54, down from around 55 in the previous quarter.
The cash and short term investments balance was $901.5 million at quarter-end (up $63.8 million during the quarter), with ON Semi generating $164.7 million from operations and spending around $57 million on capex.
At quarter-end, ON Semi had $836.9 million of long-term debt on its balance sheet. Including both short and long-term debt, the net debt position at quarter-end was $305.5 million, down from a net debt position of $399.3 million at the beginning of the quarter.
Guidance
ON Semi’s revenue and gross margin in the last quarter and guidance for the next quarter were both impacted by the floods in Thailand, which was the second natural disaster to have impacted the company in 2011.
ON Semi expects revenue of $720-760 million, or down 1-6% sequentially, with ASPs declining 2-3%. Both GAAP and non GAAP gross margins are expected to be in the 31.5-32.5% range. Operating expenses on a GAAP basis are expected to be $195-200 million, while on a non GAAP basis, they are expected to be $180-185 million.
ON Semi also expects other income/expense of around $21 million on a GAAP basis and -$12 million on a non-GAAP basis. Taxes are expected to be $4-5 million on both GAAP and non-GAAP bases, with the fully diluted share count at 460 million. This should result in earnings per share of around 7 cents on a GAAP basis and 8 cents on a non-GAAP basis, more or less in line with the Zacks Consensus Estimate of 8 cents when ON Semi reported.
ON Semi now expects the 2012 capex to come in at $250-275 million including the $50 million related to Thailand.
Recommendation
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. In the next two quarters however, we should expect to see continued softness in revenue, which should impact the company’s profitability. We therefore have a long term (3-6 month) Neutral recommendation on the shares. Our short-term (1-3 month) recommendation is also Hold, as denoted by the Zacks Rank of #3.
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