ON Semiconductor (NASDAQ:ON) Posts Better-Than-Expected Sales In Q4 But Quarterly Guidance Underwhelms

Radek Strnad /
2023/02/06 8:07 am EST

Analog chips maker ON Semiconductor (NASDAQ: ON) reported results ahead of analyst expectations in the Q4 FY2022 quarter, with revenue up 13.9% year on year to $2.1 billion. However, guidance for the next quarter was less impressive, coming in at $1.92 billion at the midpoint, being 3.87% below analyst estimates. ON Semiconductor made a GAAP profit of $604.3 million, improving on its profit of $426.4 million, in the same quarter last year.

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ON Semiconductor (ON) Q4 FY2022 Highlights:

  • Revenue: $2.1 billion vs analyst estimates of $2.07 billion (1.2% beat)
  • EPS (non-GAAP): $1.32 vs analyst estimates of $1.26 (4.4% beat)
  • Revenue guidance for Q1 2023 is $1.92 billion at the midpoint, below analyst estimates of $1.99 billion
  • Free cash flow of $389.3 million, down 46.7% from previous quarter
  • Inventory Days Outstanding: 136, up from 126 previous quarter
  • Gross Margin (GAAP): 48.5%, up from 45% same quarter last year

“We delivered outstanding results in 2022 as we continue our disciplined execution and transformation. Revenue for 2022 grew by 24%, non-GAAP gross margin expanded by 880 bps, and non-GAAP operating income grew four times faster than revenue driven by our focus on the secular megatrends of electric vehicles, ADAS, alternative energy and industrial automation. We are focused on our key strategic initiatives such as ramping silicon carbide in support of our long-term supply agreements. Despite the current macroeconomic uncertainty, the long-term outlook for our business remains robust with a 38% year-over-year increase in our design win funnel,” 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. 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 15.8% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.84 billion to $2.1 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

While ON Semiconductor beat analysts' revenue estimates, this was a very slow quarter with just 13.9% revenue growth. This marks 9 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.

ON Semiconductor's revenue growth was positive this quarter, but the company is guiding to decline of 1.28% YoY next quarter, while analysts expect to see declines of 3.41% 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, 9 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from ON Semiconductor's Q4 Results

Sporting a market capitalization of $34.9 billion, more than $2.91 billion in cash and with positive free cash flow over the last twelve months, we're confident that ON Semiconductor has the resources it needs to pursue a high growth business strategy.

We were very impressed by the strong improvements in ON Semiconductor’s operating margin this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and inventory levels increased. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But investors might have been expecting more and the company is down 3.34% on the results and currently trades at $78.13 per share.

Should you invest in ON Semiconductor 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.