ON Semiconductor (NASDAQ:ON) Beats Expectations in Strong Q2 But Stock Drops In Pre-market

Jabin Bastian /
2022/08/01 8:07 am EDT

Analog chips maker ON Semiconductor (NASDAQ: ON) announced better-than-expected results in the Q2 FY2022 quarter, with revenue up 24.8% year on year to $2.08 billion. On top of that, guidance for next quarter's revenue was surprisingly good, being $2.12 billion at the midpoint, 5.18% above what analysts were expecting. ON Semiconductor made a GAAP profit of $456.3 million, improving on its profit of $184.1 million, in the same quarter last year.

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ON Semiconductor (ON) Q2 FY2022 Highlights:

  • Revenue: $2.08 billion vs analyst estimates of $2.01 billion (3.5% beat)
  • EPS (non-GAAP): $1.34 vs analyst estimates of $1.26 (6.31% beat)
  • Revenue guidance for Q3 2022 is $2.12 billion at the midpoint, above analyst estimates of $2.01 billion
  • Free cash flow of $202.7 million, down 33.4% from previous quarter
  • Inventory Days Outstanding: 136, down from 138 previous quarter
  • Gross Margin (GAAP): 49.7%, up from 38.3% same quarter last year

“Our ability to execute on our business transformation continues to deliver record revenue performance with 25% year-over-year growth and non-GAAP gross margin expansion of 1,130 basis points to 49.7% in the second quarter. These financial results validate our momentum in the market and the differentiation of our intelligent power and sensing solutions,” said Hassane El-Khoury, president and CEO 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 with specialization in autos, industrial applications, and power management in cloud data centers.

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. The biggest secular growth drivers currently are the adoption of electric vehicles, 5G networks and Internet of Things connectivity, and demand for chips that reduce power consumption. 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 unremarkable, averaging 11% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.66 billion to $2.08 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 decent quarter for ON Semiconductor as revenues grew 24.8%, topping analyst estimates by 3.5%. This marks 7 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

However, ON Semiconductor believes the growth is set to continue, and is guiding for revenue to grow 21.6% YoY next quarter, and Wall St analysts are estimating growth 6.18% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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 inventory days came in at 136, 11 days above the five year average, suggesting that despite the recent decrease the inventory levels are still higher than what we used to see in the past.

Key Takeaways from ON Semiconductor's Q2 Results

With a market capitalization of $29 billion, more than $1.79 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were very impressed by the strong improvements in ON Semiconductor’s gross margin this quarter. And we were also glad to see the improvement in operating margin. Zooming out, we think this impressive quarter should have shareholders feeling very positive. But the market was likely expecting more and the company is down 6.4% on the results and currently trades at $62.5 per share.

ON Semiconductor may have had a good quarter, so should you invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.