ON Semiconductor (NASDAQ:ON) Reports Strong Q3, Quarterly Guidance In Line

Radek Strnad /
2022/10/31 8:07 am EDT

Analog chips maker ON Semiconductor (NASDAQ: ON) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 25.8% year on year to $2.19 billion. The company expects that next quarter's revenue would be around $2.07 billion, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. ON Semiconductor made a GAAP profit of $312.4 million, improving on its profit of $310.4 million, in the same quarter last year.

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ON Semiconductor (ON) Q3 FY2022 Highlights:

  • Revenue: $2.19 billion vs analyst estimates of $2.11 billion (3.58% beat)
  • EPS (non-GAAP): $1.45 vs analyst estimates of $1.31 (10.4% beat)
  • Revenue guidance for Q4 2022 is $2.07 billion at the midpoint, below analyst estimates of $2.08 billion
  • Free cash flow of $731.3 million, up from $202.7 million in previous quarter
  • Inventory Days Outstanding: 126, down from 136 previous quarter
  • Gross Margin (GAAP): 48.2%, up from 41.3% same quarter last year

“onsemi has delivered another quarter of record results stemming from continued growth in our focus markets of automotive and industrial. We remain confident in our long-term outlook as we continue to win where semiconductor content growth is accelerating for vehicle electrification, energy infrastructure, advanced safety and factory automation. We have taken a proactive and deliberate approach over the last several quarters to make the structural changes required to strengthen our business, and we are in a better position than ever to navigate the current uncertainty in the market,” 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 14.1% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.74 billion to $2.19 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 25.8%, topping analyst estimates by 3.58%. This marks 8 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 12.3% YoY next quarter, and Wall St analysts are estimating growth 3.37% 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 126, which is exactly around the five year average, suggesting there isn't any unusual buildup of inventory at the moment.

Key Takeaways from ON Semiconductor's Q3 Results

Sporting a market capitalization of $29.2 billion, more than $2.45 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 unfortunate to see that the revenue guidance for the next quarter slightly missed analysts' expectations. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company is down 2.09% in the pre-market and currently trades at $66 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.