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ON Misses, but Guides in Line - Analyst Blog

Date : 05/04/2012 @ 11:06AM
Source : Zacks
Stock : Intel Corp. (MM) (INTC)
Quote : 33.98  1.4 (4.30%) @ 8:10PM
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ON Misses, but Guides in Line - Analyst Blog

ON Semiconductor (ONNN) reported first quarter 2012 earnings of 11 cents, missing the Zacks Consensus estimate by 3 cents. Results were again impacted by the flooding in Thailand, with management stating that other manufacturing locations, as well as the restoration of damaged production capacity would bring total production back up to acceptable levels.

With inventories at their lowest levels since the third quarter of 2010, a further delay could result in lost customers. 

Revenue

ON Semi reported revenue of $744.4 million, down 3.1% sequentially, 14.5% year over year and in the middle of management’s guidance range of $720-760 million, or down 1-6% sequentially.

Europe was the only geography to have grown in the last quarter. ON Semi’s revenue from Europe was 14% of the total (up 4.4% sequentially). The Americas bought in another 16% (down 8.8%), while Asia (including Japan) accounted for the remaining 70% (down 3.1%).

Revenue by End Market

Following the acquisition of SANYO’s business in the year-ago quarter, 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 December quarter and 22% in the last quarter. First quarter revenue from the market declined 7.3% sequentially and 30.3% from the year-ago quarter.

Roughly half of SANYO’s acquired business caters to the consumer market, so there should be a nice pickup as manufacturing issues are resolved and consumer demand (especially in China) improves.

Automotive brought in 26% of revenue, up 9.6% sequentially and 1.1% year over year. The sequential increase in the last quarter was the result of new vehicle launches using solutions from ON Semi for LED lighting, start/stop applications and park assist. ON Semi also mentioned that it had key design wins in all the above categories and also gained share at several Chinese and Korean OEMs.

Management remains focused on growing the dollar content per vehicle, which is now at around $90. The increasing number of cars, the increasing use of electronics in the automotive sector, as well as increased adoption of ON Semi products remain longer-term drivers.

China is developing into an important market and On Semi last year 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 20% of revenue. The market was impacted by weak demand in the last quarter, with revenue declining 7.7% sequentially, although flat year over year. While the market remains sluggish as of now, demand is showing improving trends. Therefore, ON Semi expects a stronger second half.

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 3.1% sequentially and 26.7% from a year ago. The sequential decline seems to indicate that the impact on supply chain issues related to the Thailand flooding is receding. Here, too, the company is seeing design-win momentum in the 3D projection, HDD, gaming, commercial desktop and server markets.

What is most encouraging is the fact that ON Semi will gain share with Intel’s (INTC) new Ivy Bridge chip, which is expected to ramp very fast this year. Overall, the company’s power systems now command a 30-35% share in the notebook maket.

Communications accounted for 14% of revenue, down 9.5% sequentially and 7.9% year over year. On Semi continues to drive penetration in the smartphone market, with design wins for its autofocus and image stabilization products. On Semi can support a dollar content of $3.00 to $3.50 per smartphone, including its camera solution.

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.

Margins

Gross margin for the quarter was 32.9%, up 6 basis points (bps) and down 305 bps from last year. Factory cost reductions and a more favorable mix were positive for ON Semi’s core business.

SANYO remained the weak link. Not only are margins lower, but they have also been affected in the recent past by the hit to revenue. Management intends to take cost reduction actions in this area as well, which should improve margins going forward.  

The total operating expenses of $179 million were more or less flat on both sequential and year-over-year bases. The operating margin shrunk 89 bps sequentially and 638 bps from last year. While higher cost of sales was the main reason for the sequential contraction, the decline from the year-ago quarter was impacted by higher R&D, S&M and G&A expenses as a percentage of sales. R&D increases were the most significant, followed by S&M and then G&A.

Net Profit

On a pro forma basis, ON Semi reported a net income of $51.1 million, or a 6.9% net income margin compared to $52.4 million, or 6.8% in the previous quarter and $113.2 million or 13.0% in the first quarter of last year.

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 difer 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 income of $28.2 million ($0.06 per share) compared to loss of $8.8 million (-$0.02 per share) in the previous quarter and income of $74.8 million ($0.16 per share) in the year-ago quarter.

Balance Sheet

Inventories were down 0.6% and inventory were flat at around 3.2X. Days sales outstanding (DSOs) were around 52, down from around 54 in the previous quarter.

The cash and short-term investments balance was $892.3 million at quarter-end (down $9.2 million during the quarter), with ON Semi generating $68.4 million from operations and spending around $50 million on capex.

At quarter-end, ON Semi had $811.9 million of long-term debt on its balance sheet. Including both short and long-term debt, the net debt position at quarter-end was $296.7 million, down from a net debt position of $305.5 million at the beginning of the quarter.

Guidance

ON Semi expects second quarter revenue of $745-785 million, or up 0-5% sequentially, with ASPs declining 1-2%. Both GAAP and non GAAP gross margins are expected to be in the 34.0-35.0% range. Operating expenses on a GAAP basis are expected to be $240-250 million, while on a non-GAAP basis they are expected to be $180-190 million. ON Semi also expects other income/expense of around -$10 million on both GAAP and non-GAAP bases.

Taxes are expected to be $4-5 million on a GAAP basis and $5-6 million on a non-GAAP basis, with the fully diluted share count at 465 million. This should result in earnings per share of around 1 cent on a GAAP basis and 14 cents on a non-GAAP basis, more or less in line with the Zacks Consensus Estimate of 14 cents when On Semi reported.

ON Semi previously provided a 2012 capex estimate of $250-275 million, including the $50 million related to Thailand. However, management now expects this to be slightly lower, since demand in 2012 is not expected to be as strong as that in 2011.

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. The second half of the year should be stronger than the first. Improvement in SANYO is dependent on recovery in demand out of Asia and elimination of manufacturing issues.

Cost reduction actions is expected to improve ON Semi’s total business and will be felt particularly on the SANYO side (the company is planning a significant headcount reduction).

Given the current trends, we expect it to be awhile before the company gets its act together. We therefore have a Neutral recommendation on On Semi shares for the long term (3-6 months). The Zacks Rank for the shares is #3, implying a Hold rating in the near term (1-3 months).


 
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