ON Semiconductor (NASDAQ:ON) Q1 Sales Beat Estimates, Guides For Strong Sales Next Quarter

Adam Hejl /
2022/05/02 8:16 am EDT
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Analog chips maker ON Semiconductor (NASDAQ: ON) reported Q1 FY2022 results that beat analyst expectations, with revenue up 31.2% year on year to $1.94 billion. Guidance for next quarter's revenue was $2.01 billion at the midpoint, 4.74% above the average of analyst estimates. ON Semiconductor made a GAAP profit of $530.2 million, improving on its profit of $90.3 million, in the same quarter last year.

Is now the time to buy ON Semiconductor? Access our full analysis of the earnings results here, it's free.

ON Semiconductor (ON) Q1 FY2022 Highlights:

  • Revenue: $1.94 billion vs analyst estimates of $1.9 billion (2.01% beat)
  • EPS (non-GAAP): $1.22 vs analyst estimates of $1.05 (16.3% beat)
  • Revenue guidance for Q2 2022 is $2.01 billion at the midpoint, above analyst estimates of $1.92 billion
  • Free cash flow of $304.8 million, down 33.3% from previous quarter
  • Inventory Days Outstanding: 138, up from 124 previous quarter
  • Gross Margin (GAAP): 49.4%, up from 35.1% same quarter last year

“Our focused strategy has delivered sustainable results in onsemi’s margin and growth profile with the automotive and industrial end-markets now representing 65% of our revenue. (...) With a highly differentiated portfolio of intelligent power and sensing products, strong visibility driven by long-term supply agreements, and exposure to secular megatrends of vehicle electrification, ADAS, energy infrastructure, and factory automation, we are well positioned to sustain our momentum,” 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 8.4% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.48 billion to $1.94 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 good quarter for ON Semiconductor as revenues grew 31.2%, topping analyst estimates by 2.01%. This marks 6 straight quarters of revenue growth, implying we are mid-cycle for ON Semiconductor, as a typical upcycle tends to last 8-10 quarters.

ON Semiconductor believes the growth is set to continue, and is guiding for revenue to grow 20.6% YoY next quarter, and Wall St analysts are estimating growth 7.14% over the next twelve months.

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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 138, 15 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 Q1 Results

Sporting a market capitalization of $22.5 billion, more than $1.64 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 gross margin this quarter. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was less good to see the inventory levels increase. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 3.3% on the results and currently trades at $53.8 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.