ON Semiconductor (NASDAQ:ON) No Second-Quarter Sales Surprises, Shares Soar

Analog chip manufacturer ON Semiconductor (NASDAQ:ON) announced results in line with analysts’ expectations in Q2 CY2024, with revenue down 17.2% year-over-year to $1.74 billion. On the other hand, the next quarter’s revenue guidance of $1.75 billion was less impressive, coming in 1.7% below analyst estimates. Non-GAAP earnings came in at $0.96 per share, down from earnings of $1.33 per share in the same quarter last year.

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Highlights of ON Semiconductor (ON) in the second quarter of fiscal year 2024:

Income: $1.74 billion vs. analyst estimates of $1.73 billion (slight beat)
Adjusted operating income: $477.2 million vs. analyst estimates of $462.9 million (3.1% increase)
EPS (non-GAAP): $0.96 vs. analyst estimates of $0.92 (+4.6%)
Revenue forecasts for Q3 2024 $1.75 billion at midpoint, below analyst estimates of $1.78 billion (non-GAAP EPS also below estimates)
Gross Margin (GAAP): 45.2%, compared to 47.4% in the same quarter last year
Days of pending inventory: 213, compared to 194 in the previous quarter
Free cash flow of $207.7 million, down 24.8% from the previous quarter
Market capitalization: $30.19 billion

“We remain focused on driving growth by gaining market share, doubling down on strategic markets and expanding our industry-leading product portfolio with analog and mixed-mode solutions,” said Hassane El-Khoury, President and CEO of onsemi.

ON Semiconductor (NASDAQ:ON) is a global company that was spun off from Motorola in 1999 and grew through a series of acquisitions. It is a supplier of analog circuits, specializing in automotive, industrial applications and cloud data center power management.

Analog semiconductors

Demand for analog circuits is typically tied to the overall level of economic growth, since analog circuits are the basic building blocks of most electronic goods and devices. Unlike digital circuit designers, analog circuit manufacturers tend to manufacture most of their circuits themselves, since analog circuit production does not require expensive leading-edge nodes. Analog product cycles are less dependent on major secular growth drivers and are much longer, often 5–7 years.

Increase in sales

ON Semiconductor’s revenue growth over the past three years has been nothing out of the ordinary, averaging 10.9%. This quarter, revenue fell to $1.74 billion from $2.09 billion in the same quarter last year. Semiconductors are a cyclical industry, and long-term investors should expect periods of high growth followed by periods of declining revenue (which can sometimes be a good time to buy).

It was a slow quarter for the company, as its revenue fell 17.2% year over year, in line with analyst estimates. That could signal that the current downturn is deepening.

ON Semiconductor’s revenue growth has slowed over the past three quarters, and the management team is forecasting a revenue decline in the next quarter. As a result, the company is forecasting a year-over-year revenue decline of 19.8%, while analysts are expecting a 4.3% decline over the next 12 months.

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Product demand and inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers because it reflects the company’s 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. A sustained increase in DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may be forced to reduce production.

ON Semiconductor’s DIO was 213 for the quarter, which is 70 days higher than the five-year average, suggesting the company’s stock has risen to a higher level than we have seen in the past.

Key conclusions from ON Semiconductor’s Q2 results

We were pleased to see that ON Semiconductor beat analysts’ expectations for revenue, operating income, and earnings per share for the quarter. On the other hand, revenue guidance for the next quarter fell short of analysts’ expectations, and inventory levels rose. Overall, it was a mixed quarter for ON Semiconductor, but the market seemed to be taking some comfort and focusing on the positives. Shares rose 5.7% to $74.20 immediately after the report.

Is ON Semiconductor worth investing in right now? When making such a decision, it is important to consider valuation, business features, as well as what happened in the last quarter. We discussed this in our full research report, which you can read here, it is free.