ON Semiconductor (NASDAQ:ON) Reports Q4 In Line With Expectations But Quarterly Guidance Underwhelms

Jabin Bastian /
2024/02/05 8:10 am EST

Analog chips maker ON Semiconductor (NASDAQ:ON) reported results in line with analysts' expectations in Q4 FY2023, with revenue down 4.1% year on year to $2.02 billion. On the other hand, next quarter's revenue guidance of $1.85 billion was less impressive, coming in 3.9% below analysts' estimates. It made a non-GAAP profit of $1.25 per share, down from its profit of $1.32 per share in the same quarter last year.

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ON Semiconductor (ON) Q4 FY2023 Highlights:

  • Revenue: $2.02 billion vs analyst estimates of $2.01 billion (small beat)
  • EPS (non-GAAP): $1.25 vs analyst estimates of $1.20 (4% beat)
  • Revenue Guidance for Q1 2024 is $1.85 billion at the midpoint, below analyst estimates of $1.92 billion
  • Free Cash Flow of $220.7 million, up 65.2% from the previous quarter
  • Inventory Days Outstanding: 179, up from 165 in the previous quarter
  • Gross Margin (GAAP): 46.7%, down from 48.5% in the same quarter last year
  • Market Capitalization: $30.51 billion

“Our momentum continued this past year as we achieved record automotive revenue and 4x year-over-year growth in silicon carbide revenue. We continue to transform the business by building resilience into our model, enabling us to navigate uncertain market conditions and deliver more predictable and sustainable results,” 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 17.2% annually. But as you can see below, its revenue declined from $2.10 billion in the same quarter last year to $2.02 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 4.1% 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 5.6% year-on-year revenue decline while analysts are expecting a 2.3% 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 179, which is 43 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 Q4 Results

We enjoyed seeing ON Semiconductor exceed analysts' EPS expectations this quarter. That stood out as a positive in these results. On the other hand, its revenue guidance for next quarter missed analysts' expectations and its inventory levels increased. Overall, this was a mediocre quarter for ON Semiconductor, but the market is likely relieved that the results were not worse, considering some of the weaker semis prints thus far this earnings season. The stock is up 3.8% after reporting and currently trades at $73.36 per share.

ON Semiconductor may not have had the best quarter, but does that create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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