No Surprises In ON Semiconductor's (NASDAQ:ON) Q1 Sales Numbers But Quarterly Guidance Underwhelms

Kayode Omotosho /
2024/04/29 8:09 am EDT

Analog chips maker ON Semiconductor (NASDAQ:ON) reported results in line with analysts' expectations in Q1 CY2024, with revenue down 4.9% year on year to $1.86 billion. On the other hand, next quarter's revenue guidance of $1.73 billion was less impressive, coming in 5.2% below analysts' estimates. It made a non-GAAP profit of $1.08 per share, down from its profit of $1.19 per share in the same quarter last year.

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ON Semiconductor (ON) Q1 CY2024 Highlights:

  • Revenue: $1.86 billion vs analyst estimates of $1.85 billion (small beat)
  • EPS (non-GAAP): $1.08 vs analyst estimates of $1.05 (3.3% beat)
  • Revenue Guidance for Q2 CY2024 is $1.73 billion at the midpoint, below analyst estimates of $1.83 billion (EPS for the period was also below)
  • Gross Margin (GAAP): 45.8%, down from 46.8% in the same quarter last year
  • Inventory Days Outstanding: 194, up from 179 in the previous quarter
  • Free Cash Flow of $276.3 million, up 25.2% from the previous quarter
  • Market Capitalization: $29.26 billion

“The structural changes we have made to the business over the last three years have enabled us to sustain our gross margin despite challenging market conditions,” said Hassane El-Khoury, president and chief executive officer of onsemi.

Spun out of Motorola in 1999 and built through a series of acquisitions, ON Semiconductor (NASDAQ:ON) is a global provider of analog chips specializing in autos, industrial applications, and power management in cloud data centers.

Analog Semiconductors

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

ON Semiconductor's revenue growth over the last three years has been mediocre, averaging 15.4% annually. But as you can see below, its revenue declined from $1.96 billion in the same quarter last year to $1.86 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

ON Semiconductor Total Revenue

This was a slow quarter for the company as its revenue dropped 4.9% year on year, in line with analysts' estimates. This could mean that the current downcycle is deepening.

ON Semiconductor's revenue growth has decelerated over the last three quarters and its management team projects revenue to fall next quarter. As such, the company is guiding for a 17.4% year-on-year revenue decline while analysts are expecting a 6.7% drop over the next 12 months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

ON Semiconductor Inventory Days Outstanding

This quarter, ON Semiconductor's DIO came in at 194, which is 54 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from ON Semiconductor's Q1 Results

It was good to see ON Semiconductor beat analysts' revenue EPS expectations this quarter. On the other hand, its revenue and EPS guidance for next quarter missed analysts' expectations and its inventory levels increased. Overall, this was a mixed quarter for ON Semiconductor. The stock is up 2.9% after reporting and currently trades at $70 per share.

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