ON Semiconductor Corporation (ON Quick QuoteON - Free Report) delivered fourth-quarter 2018 non-GAAP earnings of 53 cents per share beating the Zacks Consensus Estimate by 5 cents. Further, the figure surged 36% year over year but declined 7% sequentially.

The company reported revenues of $1.503 billion, missing the Zacks Consensus Estimate of $1.504 billion. The figure grew 9% year over year but declined 3% sequentially. Notably, the figure was within management’s guided range of $1.480-$1.530 billion.

Notably, ON Semiconductor Aizu Co., Ltd., or OSA accounted for $19 million of fourth-quarter revenues. OSA refers to 8-inch wafer fab manufacturing joint venture based out of Aizu-Wakamatsu, Japan.

Sturdy adoption and favorable product mix of the company’s diversified product portfolio and end-markets drove year-over-year growth amid soft demand from Greater China.

2018 at a Glance

For the full year, non-GAAP earnings advanced 34.2% year over year to $1.96 per share.

In 2018, non-GAAP revenues grew 9.1% over 2017 to $5.878 billion. The company’s largest customer accounted for around 5% of total revenues in 2018.

ON Semiconductor reported non-GAAP gross margin and operating margin of 38.1% and 16.7%, respectively. The respective figures expanded 120 basis points (bps) and 170 bps on a year-over-year basis.

Quarter in Detail

Business Units Metrics:

ON Semiconductor has three business units namely — Power Solutions Group or PSG (revenues of $787 million), Analog Solutions Group (revenues of $530 million) and Intelligent Sensing Group (revenues of $186 million).

End-Market Metrics:

Automotive (32% of revenues) end-market revenues were approximately $475 million, up 9% year over year. Excluding $14 million contribution from OSA venture, the segment witnessed year-over-year revenue growth of 5%.

In the reported quarter, the company’s CMOS image sensors, ADAS, power management products, wireless charging, mixed signal ASICs, MOSFETs and sensor interface products witnessed strong demand. Continued growth in ADAS and LEDs design wins fueled growth. Expanding IGBT and Silicon Carbide (SiC) product portfolio hold promise.

The company holds a competitive edge over its peers when it comes to delivering a comprehensive image sensor solution for autonomous driving applications and ADAS. The solution features exhaustive range of pixel densities which include 1, 2, and 8 megapixels, on a single platform.

Management is optimistic about growing influence of its ADAS offerings. In fact, the company revealed that per TSR data, ON Semiconductor holds market share of 62% in the automotive image sensor market and 81% in ADAS domain of automotive imaging market.

Moreover, a Germany-based automotive OEM selected company’s 2 and 8 megapixels image sensors designed for level 2 and level 3 ADAS in the reported quarter.

However, weakness in China weighed on segmental revenues growth.

Industrial (26%) end-market revenues increased 8% year over year to $390 million. Unfavorable macroeconomic conditions were offset by solid adoption of power modules, image sensors, machine vision line of products aided growth.

Moreover, the company’s latest platform of products including high and medium voltage power modules aimed at providing higher efficiency hold promise. Strength in industrial portfolio positions ON Semiconductor well to penetrate a wider range of the industrial markets.

Management is also optimistic regarding the growing influence of company’s products in medical domain, primarily in hearing and personal diagnostics markets.

Communications (20%) end-market revenues soared 20% year over year to $300 million. The company’s strength in medium voltage MOSFETs is aiding it in penetrating key global markets, including 5G infrastructure.

Notably, slowdown witnessed in smart-phone market was partially mitigated by increased adoption of its content on major platforms.

Computing (11%) grew 22% year over year to $167 million, primarily due to sturdy server solutions domain.

Consumer (11%) end-market revenues came in at $171 million. Excluding $4.2 million contribution from OSA venture, the figure declined 13% from the year-ago quarter, primarily owing to sluggishness in Greater China.

Operating Details

Non-GAAP gross margin of 37.6% expanded 40 bps on a year-over-year basis but contracted 80 bps sequentially. OSA venture limited margin expansion by 50 bps in the reported quarter. Further, increase in select input costs impacted the margin. However, strengthened product mix reflecting improvement in operational efficiency aided margin expansion year over year.

Non-GAAP operating expenses grew 3.9% from the year-ago quarter to $317.3 million. However, the figure declined 1.4% from the prior-reported quarter.

Non-GAAP operating margin expanded 150 bps on a year-over-year basis to 16.8%. However, the figure contracted 100 bps sequentially. OSA venture limited margin expansion by 20 bps.

Balance Sheet & Cash Flow

As on Dec 31, 2018, ON Semiconductor had cash and cash equivalents of approximately $1.070 billion, up from $951 million as of Sep 28, 2018.

The company exited the fourth quarter with total debt (including current portion) amounting to $2.766 billion up from $2.715 billion in the previous quarter.

During the reported quarter, cash from operations came in at $421 million ahead of the previous quarter’s figure of $358.2 million. The company also generated free cash flow of $289 million compared with $227.8 reported in the third quarter.

The company repurchased 11.5 million shares worth $200 million in the reported quarter.

Tepid Guidance

For the first quarter of 2019, ON Semiconductor forecasts revenues to be in the range of $1.365-$1.415 billion (mid-point $1.39 billion), given its booking trends, estimated turn level and backlog level. Notably, the mid-point is below the Zacks Consensus Estimate, currently pegged at $1.45 billion.

Seasonality and uncertainty in macroeconomic environment, primarily sluggishness in Greater China is compelling management to stay cautious. Softness in smartphone market and stabilizing capital expenses by cloud service providers (CSPs) are other concerns.

Both Automotive and Industrial end-market revenues are anticipated to remain flat or decline sequentially. Meanwhile, Communications, Computing and Consumer end market revenues are anticipated to decline on a quarter-over-quarter basis.

Non-GAAP gross margin is projected to be in the range of approximately 36.4-37.4%. Non-GAAP operating expenses are expected in the range of $300-$314 million.

Conclusion

Despite challenging macroeconomic conditions, ON Semiconductor anticipates to grow in fiscal 2019. Accelerated deployment of 5G through 2019 bodes well for demand of the company’s medium voltage MOSFETs, consequently driving Communications end-market revenues.

Strength in server, ADAS portfolio, and increasing content over major platforms, are other factors, anticipated to favor the company’s growth prospects.

Zacks Rank & Stocks to Consider

Currently, ON Semiconductor carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader Computer and Technology sector are Marvell Technology Group Ltd. (MRVL Quick QuoteMRVL - Free Report) , Cloudera and MeetMe , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Marvell, Cloudera and MeetMe is forecasted at 9.4%, 15% and 20%, respectively.

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