ON Semiconductor (ONNN) reported second quarter earnings that beat the Zacks Consensus Estimate by 4 cents.

Revenue by End Market

Revenue of $472.9 million was up 12.6% sequentially and down 18.7% year over year. The company saw sequential improvement across all end markets except communications and medical, although all end markets were down on a year-over-year basis. Consumer witnessed the strongest growth, increasing 47.3% sequentially. Automotive and computing also grew double-digits.

Year-over-year declines moderated in all except the communications and medical markets. Computing was again the largest end market in the last quarter, generating 27% of sales, followed by automotive with 18%, comunications 17%, industrial/mil/aero with 17%, consumer 17% and medical 4%.

Revenue by Segment

The double-digit year-over-year decline was across all except the standard products segment, with Digital & Mixed Signal the weakest, followed by Computing & Consumer and Automotive & Power. The Standard Products segment was down single-digits. Standard Products generated 32% of revenue (up 15.5% sequentially), computing and consumer generated 24% (up 21.1%), automotive and power 23% (up 16.5%) and digital and mixed signal 21% (down 2.7%).

Geographically, Asia generated the largest chunk of revenue, with a 68% contribution. Revenue increased 14.5% sequentially. Europe generated 17%, a sequential increase of 45.4%. The Americas brought in 16%, down 14.2% sequentially.

Gross Margin

Gross margin for the quarter was 37.9%, up 590 basis points (bps) from the previous quarter’s 32.0%. The gross margin improvement was across all four segments and was partly attributable to strengthening demand, and partly due to significantly higher utilization rates. Gross margin increased 125 bps from the year-ago quarter.

Gross margins were up across all segments, with the highest margin Digital & Mixed Signal segment growing 132 basis points (bps). The Automotive & Power segment saw the strongest margin expansion, up 808 bps sequentially. The segment now generates margins comparable to the Computing and Consumer segment, which increased 376 bps sequentially. The Standard Products segment continues to lag historical trends, although it grew very nicely by 335 bps. All except the Digital & Mixed Signal segment declined on a year-over-year basis.

Operating Performance

Operating expenses of $100.9 million were higher than the previous quarter’s $97.2 million. However, the operating margin expanded 772 bps sequentially and 311 bps year over year. This higher margin was largely on account of the lower COGS [costs of goods sold], although lower G&A [general and administrative], R&D [research and development] and S&M [sales and marketing] (as a percentage of sales) also contributed.

The Automotive and Power segment saw the greatest sequential expansion in operating margin, followed by Computing and Consumer and then Standard Products. Digital and Mixed Signal grew nicely from the year-ago quarter, but saw a small sequential decline. All other segments declined from the year-ago quarter.

Net Profit

On a pro forma basis, ONNN had a net income of $59.3 million, or a 12.5% net income margin compared to $22.2 million, or 5.3% in the previous quarter and profit of $66.3 million or 11.4% in the third quarter of last year. Fully diluted pro forma earnings per share (EPS) were $0.14 compared to $0.05 in the June 2009 quarter and $0.16 in the comparable prior-year quarter.

Our pro forma estimate excludes restructuring charges, stock-based compensation expenses and amortization of intangibles in the last quarter. Our pro forma estimate may not match management’s presentation due to the addition/exclusion of some items not considered by management. On a fully diluted GAAP basis, the company recorded a net income of $29.9 million ($0.07 per share) compared to a loss of $3.0 million ($0.01 per share) in the previous quarter and a net profit of $57.2 million ($0.14 per share) in the prior-year quarter.

Balance Sheet

Inventories were down 2.0% sequentially, with inventory turns increasing from 4.1x to 4.4x. Days sales outstanding (DSOs) were around 51 days, down from 55 days at the end of the June quarter. The cash and short-term investments balance was $470 million at quarter-end, with the company generating $88 million from operations. ON Semi spent $9.3 million on capex, $23.3 million on the repurchase of long-term debt and $4.1 million on share repurchases. At quarter-end, ON Semiconductor had $729 million of debt on its balance sheet, or a net debt position of $260 million.

Guidance

Management provided guidance for the third quarter. Accordingly, revenue is expected to come in at $480-495 million, up 2-5% sequentially. The GAAP gross margin is expected to be 38-39%. Excluding acquisition-related inventory markup of approximately $2 million and stock-based compensation expenses of approximately $3 million, the non-GAAP gross margin is expected to be 39-40%. GAAP operating expenses were $130-135 million.

Excluding amortization of intangibles, stock based compensation expense, restructuring charges, asset impairments and other charges totaling approximately $25 million, the non-GAAP operating expenses are expected to range between $105 and $110 million. Interest and other expenses are expected to be $10-11 million. GAAP taxes are expected to total $5 million. The diluted share count is expected to be 440 million. Management also expects to spend around $25 million on capex in the fourth quarter.
Read the full analyst report on “ONNN”
Zacks Investment Research