Analog chips maker ON Semiconductor (NASDAQ:ON) reported Q3 FY2023 results topping analysts' expectations, with revenue flat year on year at $2.18 billion. However, next quarter's revenue guidance of $2 billion was less impressive, coming in 8.24% below analysts' estimates. Turning to EPS, ON Semiconductor made a non-GAAP profit of $1.39 per share, down from its profit of $1.45 per share in the same quarter last year.
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ON Semiconductor (ON) Q3 FY2023 Highlights:
- Revenue: $2.18 billion vs analyst estimates of $2.15 billion (1.52% beat)
- EPS (non-GAAP): $1.39 vs analyst estimates of $1.34 (3.45% beat)
- Revenue Guidance for Q4 2023 is $2 billion at the midpoint, below analyst estimates of $2.18 billion
- Free Cash Flow of $133.6 million is up from -$39.8 million in the previous quarter
- Inventory Days Outstanding: 165, up from 162 in the previous quarter
- Gross Margin (GAAP): 47.3%, down from 48.3% in the same quarter last year
“Our disciplined approach and execution resulted in another solid quarter, demonstrating the resilience in our business amid market softness,” 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 17.8% annually. But as you can see below, its revenue declined from $2.19 billion in the same quarter last year to $2.18 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).
Even though ON Semiconductor surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 0.54% year on year.
ON Semiconductor's revenue inverted from positive to negative growth this quarter, which was unfortunate to see. Looking ahead to the next quarter, the company's management team forecasts a 4.92% year-on-year revenue decline. On the other hand, analysts expect revenue to turn positive over the next 12 months, with average estimates of 5.78% growth.
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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.
This quarter, ON Semiconductor's DIO came in at 165, which is 32 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 Q3 Results
With a market capitalization of $36 billion, a $2.68 billion cash balance, and positive free cash flow over the last 12 months, we're confident that ON Semiconductor has the resources needed to pursue a high-growth business strategy.
It was good to see ON Semiconductor beat analysts' EPS expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street's estimates. On the other hand, its revenue guidance for the next quarter underwhelmed, and its operating margin decreased. Overall, the results could have been better. The company is down 4.14% on the results and currently trades at $80.11 per share.
ON Semiconductor may have had a tough quarter, but does that actually 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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The author has no position in any of the stocks mentioned in this report.