ON Semiconductor (ONNN) reported fourth quarter earnings that beat the Zacks Consensus estimate by 4 cents.
Revenue
Revenue of $497.1 million was up 5.1% sequentially and down 1.7% year over year. This was better than management’s revenue expectations of 480-495 million (up 2-5% sequentially). The Americas drove the strength in the last quarter, increasing 41.8% sequentially. In comparison, Europe was flat (up 0.6%) and Asia actually declined 2.2%. The largest chunk of ON’s revenue continues to come from Asia , so a pickup in the region would lead to much stronger growth.
Revenue by End Market
The company saw sequential improvement across all end markets except communications, although communications, industrial and medical were all down from the year-ago quarter.
Computing was the largest end market with a 26% revenue share. The segment was up 1.2% and 15.0% year over year. The significant increase from the year-ago quarter was driven by both desktop and notebook products (power management, audio amplifiers, protection devices, thermal management and standard products). Management estimates that the company’s core power management products acquired a 30% share of notebook platforms by 2009-end.
Automotive was the second largest market in the last quarter, increasing 11.0% sequentially and 20.8% year over year. Components sold into this market benefited from the stronger demand, which also served to clean out excess inventory.
Consumer was 18% of total revenue (up 11.3% sequentially and 14.4% year over year). Segment results were driven by LCD TVs, set top boxes and MP3 players, although game consoles remained weak. Power management, video amplification and ESD protection products were the main drivers here.
Industrial brought in 18% of revenue, up 11.3% sequentially, but down 3.6% from the year-ago quarter. Management stated that the industrial business started coming back in the last quarter and normal seasonality indicates that the first quarter will be stronger.
Communications generated 15% of revenue, down 7.2% sequentially and 23.7% year over year. Medical, representing 4% of revenue, grew 5.1% sequentially and declined 32.2% year over year. These two markets continue to face recessionary pressures.
Revenue by Segment
The largest segment is Standard Products, which generated 33% of revenue in the last quarter. Segment revenue was up 7.1% sequentially and 19.0% from the year-ago quarter. Both the Automotive & Power and Computing & Consumer brought in 23% and performed moderately well.
Digital & Mixed Signal, which generated 21%, was the weakest segment in the last quarter, declining 20.6% from the year-ago quarter, although it was up 7.6% sequentially. All segments performed significantly better than the Sep quarter.
Gross margin for the quarter was 40.6%, up 264 basis points (bps) from the previous quarter’s 37.9%. The gross margin improvement was driven by higher volumes, higher utilization rates and less than seasonal price erosion (less than 1%). The company’s fab consolidation initiatives also helped lower the cost structure.
Operating expenses of $95.5 million were lower than the previous quarter’s $100.9 million. Operating margin expanded 477 bps sequentially and 176 bps year-over-year to 21.3%. COGS, G&A and R&D were all down significantly as a percentage of sales, more than offsetting the increase in S&M as a percentage of sales.
Our gross and operating profit estimates exclude stock based compensation in addition to one-time charges.
Net Profit
On a pro forma basis, ON Semiconductor had a net income of $84.5 million, or a 17.0% net income margin compared to $45.8 million, or 9.7% in the previous quarter and profit of $75.8 million or 15.5% in the fourth quarter of last year. Our pro forma estimate excludes restructuring charges, amortization of intangibles and non-cash interest expenses in the last quarter but includes stock based compensation. 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 $68.0 million ($0.15 per share) compared to $29.9 million ($0.07 per share) in the previous quarter and a net loss of $506.7 million (-$1.24 per share) in the prior-year quarter. The year-ago quarter included a $544.5 million goodwill impairment charge, which was the reason for the GAAP loss in the quarter.
Balance Sheet
Inventories were up 2.2% sequentially, with inventory turns flat at around 4.4X. Days sales outstanding (DSOs) were around 48, a significant improvement over the 51 days in the Sep quarter and 55 days in the Jun quarter, reflecting better collection patterns. The cash and short term investments balance was $571 million at quarter-end, with the company generating $102 million from operations. ON Semi spent around $9 million on capex, excluding $15 million, which got pushed into 2010.
At quarter-end, ON Semiconductor had $728 million of debt on its balance sheet, or a net debt position of $156 million, down from a net debt position of $260 million at the end of the Sep 2009 quarter.
Guidance
Management provided encouraging guidance for the first quarter. Accordingly, revenue is expected to come in at $515-525 million, up 4-6% sequentially. The GAAP gross margin is expected to be 40%-41%. Excluding acquisition-related inventory markup of approximately $3 million, the non GAAP gross margin is expected to be 40.5%-41.5%. GAAP operating expenses were $130-135 million.
Excluding amortization of intangibles and restructuring and asset impairment charges of approximately $10 million, the non GAAP operating expenses are expected to range between $162 million and $167 million. Stock based compensation expenses are expected to be around $13-14 million. The increase from the Dec quarter is due to reinstatement of pay and bonus accruals in the first quarter. Interest and other expenses are expected to be $10-11 million. GAAP and non-GAAP taxes are expected to total $4 million. The diluted share count is expected to be 445 million. Management also expects to spend around $30-40 million on capex in the first quarter.
Estimate Revisions
The stronger guidance prompted 17 of the 24 analysts covering the stock to raise their estimates for the Mar 2010 quarter. Consequently, the Zacks Consensus estimate for the quarter jumped up from $0.13 to $0.16. Estimates were also revised for the Jun quarter and the full-year 2010. Following the revisions, the surprise expected for the quarter is 0.0%.
Our calculations indicate that analysts are expecting better results than the guidance provided by management, which would be in-line with historical trends. We are also positive about the earnings surprise history, since the company has beaten the Zacks Consensus by 31.11% on average over the past four quarters.
However, despite improving business trends, ON Semiconductor continues to carry a huge amount of debt and has a net debt position of $156 million. We also believe that the ever-increasing competition, restrictive covenants and some residual integration risks remain. Thus we reiterate our long term Neutral position on the shares.
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