ON Semiconductor (ONNN) reported first-quarter earnings that beat the Zacks Consensus estimate by 3 cents.
Revenue
Revenue of $550.2 million was up 10.7% sequentially and 45.1% year over year. This was better than management’s revenue expectations of $515-$525 million, or an increase of 4-6% sequentially. Excluding the revenue contribution from California Micro Devices, which the company acquired during the quarter, revenue was roughly $543.7 million (up 9.4% sequentially and 43.4% year-over-year), which was still much better than the guidance.
Europe grew the strongest in the last quarter, increasing 16.2% sequentially. In comparison, the Americas region was up 9.4% and Asia up 7.6%. The largest chunk of ON Semi’s revenue continues to come from Asia (particularly China and Singapore).
Revenue by End Market
The company saw sequential improvement across all end markets except consumer, which was down as expected due to seasonality. All end markets were up double-digits from the year-ago quarter.
Computing was the largest end market with a 26% revenue share. The segment was up 55.4% year over year. The significant increase from the year-ago quarter was driven by both desktop and notebook products (power management where the company took market share, as well as 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 the end of 2009.
Automotive was the second largest market in the last quarter, increasing 9.4% sequentially and 60.3% year over year. Components sold into this market benefited from much stronger demand and distributors building inventory.
Industrial brought in 19% of revenue, up 15.5% sequentially and 36.2% from the year-ago quarter. The industrial business was driven by a broad recovery to prior peak levels. The company saw particular strength in some pockets, such as custom analog, mixed signal and ASIC, as well as products related to factory automation tools and imaging equipment.
Consumer was 16% of total revenue (down 2.8% sequentially and up 63.9% year over year). The increase from the year-ago quarter was driven by all product lines except analog switches.
Communications generated 16% of revenue, up 16.7% sequentially and 14.7% year over year. Medical, representing 4% of revenue, grew 9.4% sequentially and 14.7% year over year. Both markets rebounded strongly in the last quarter.
Revenue by Segment
The largest segment is Standard Products, which generated 32% of revenue in the last quarter. Segment revenue was up 8.6% sequentially and 50.2% from the year-ago quarter. Both the Automotive & Power and Computing & Consumer brought in 23% and performed equally well.
Digital & Mixed Signal, which generated 22% of total revenue in the last quarter, increased strongly by 16.9% sequentially and 35.6% from the year-ago quarter. All segments performed significantly better than the December quarter.
Margins
Gross margin for the quarter was 41.4%, up 151 basis points (bps) from the previous quarter’s 39.9%. The gross margin improvement was driven by higher volume, which helped cost absorption, as well as more stable pricing.
Operating expenses of $132.3 million were up 26.8% sequentially. The operating margin declined 184 bps sequentially and expanded 1,652 bps year-over-year to 17.1%. Both R&D and G&A increased sequentially as a percentage of sales, offsetting the lower COGS and S&M. R&D as a percentage of sales also increased from the year-ago quarter, although this was more than offset by declines in all other expenses.
Net Profit
On a pro forma basis, ON Semi had a net income of $79.5 million, or a 14.6% net income margin compared to $84.5 million, or 17.0% in the previous quarter and loss of $24.5 million or 6.5% in the first 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 $56.5 million ($0.13 per share) compared to $68.0 million ($0.15 per share) in the previous quarter and a net loss of $33.9 million (-$0.08 per share) in the prior-year quarter.
Balance Sheet
Inventories were up 10.3% sequentially, with inventory turns down slightly from around 4.4X to around 4.3X. Days sales outstanding (DSOs) were around 50, compared to 47 in the December 2009 quarter.
At quarter-end, cash and short term investments balance was $560.7 million, with the company generating $109.5 million from operations. ON Semi spent around $41.0 million on capex, $66.8 million on acquisitions (excluding cash acquired), $3.8 million on share repurchases and $4.4 million on debt repayment.
At quarter-end, ON Semi had $823.5 million of debt on its balance sheet, or a net debt position of $262.8 million, down from a net debt position of $156 million at the end of the December 2009 quarter.
Guidance
Management provided an encouraging guidance for the first quarter. Accordingly, revenue is expected to come in at $565-$580 million, up 4-7% sequentially.
GAAP gross margin is expected to be in the range of 41.5%-42.5%. Excluding special items of approximately $3 million, non GAAP gross margin is expected to be 42.0%-43.0%. GAAP operating expenses are expected to be $138-$142 million. Excluding special items of approximately $10 million, the non GAAP operating expenses should range between $128 million and $132 million.
Interest and other expenses are anticipated at $10 million and non-cash interest expense approximately $7 million. GAAP and non-GAAP taxes are expected to total $4 million and $3 million, respectively. The diluted share count is seen at 445 million.
Management also expects to spend around $130-160 million on equipment purchases in 2010 and another $30 million on buildings to consolidate offices in the Bay area, as well as the consolidation of assembly and test operations in the Philippines.
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