No Surprises In ON Semiconductor's (NASDAQ:ON) Q4 Sales Numbers But Quarterly Guidance Underwhelms

Full Report / February 05, 2024

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.

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

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.

ON Semiconductor’s peers and competitors include Analog Devices (NASDAQ:ADI), Texas Instruments (NASDAQ:TXN), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), NXP Semiconductors NV (NASDAQ:NXPI), Monolithic Power Systems (NASDAQ:MPWR), Marvell Technology (NASDAQ:MRVL), and Microchip (NASDAQ:MCHP).

Analog Semiconductors

Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods. Read More The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.

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.

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.

Pricing Power

In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. ON Semiconductor's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 46.7% in Q4, down 1.8 percentage points year on year.

ON Semiconductor Gross Margin (GAAP)

ON Semiconductor's gross margins have been trending down over the last 12 months, averaging 47%. This weakness isn't great as ON Semiconductor's margins are already slightly below the industry average and falling margins point to potentially deteriorating pricing power.


ON Semiconductor reported an operating margin of 31.6% in Q4, down 2.6 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.

ON Semiconductor Adjusted Operating Margin

ON Semiconductor's operating margins have been trending down over the last year, averaging 32.3%. However, the company's profitability is still above average for semiconductor companies, driven by an efficient cost structure.

Earnings, Cash & Competitive Moat

Wall Street expects earnings per share to decline 8.1% over the next 12 months, although estimates will likely change after earnings.

Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. ON Semiconductor's free cash flow came in at $220.7 million in Q4, down 43.3% year on year.

ON Semiconductor Free Cash Flow

As you can see above, ON Semiconductor produced free cash flow of just $401.9 million in the last year, resulting in a measly 4.9% free cash flow margin. ON Semiconductor will need to improve its free cash flow conversion if it wants to stay competitive.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.

Understanding a company’s ROIC (return on invested capital) gives us insight into this because it factors the total debt and equity needed to generate operating profits. This metric is a proxy for not only the capital efficiency of a business but also a management team's ability to allocate limited resources.

ON Semiconductor's five-year average ROIC was 18.7%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+. Its returns suggest it historically did a subpar job investing in profitable growth initiatives.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, ON Semiconductor's ROIC has averaged a 23.7 percentage point increase each year. This is a good sign, and if ON Semiconductor's returns keep rising, there's a chance it could evolve into an investable business.

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.

Is Now The Time?

When considering an investment in ON Semiconductor, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for everyone who's making the lives of others easier through technology, but in the case of ON Semiconductor, we'll be cheering from the sidelines. Although its revenue growth has been solid over the last three years and its growth over the next 12 months is expected to accelerate, its low free cash flow margins give it little breathing room. And while its sturdy operating margins show it has disciplined expense controls, the downside is its gross margins are weaker than its semiconductor peers we look at.

ON Semiconductor's price-to-earnings ratio based on the next 12 months is 14.9x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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