Analog chips maker ON Semiconductor (NASDAQ:ON) met Wall Street’s revenue expectations in Q3 CY2024, but sales fell 19.2% year on year to $1.76 billion. On the other hand, next quarter’s revenue guidance of $1.76 billion was less impressive, coming in 1.1% below analysts’ estimates. Its non-GAAP profit of $0.99 per share was 2.4% above analysts’ consensus estimates.
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ON Semiconductor (ON) Q3 CY2024 Highlights:
- Revenue: $1.76 billion vs analyst estimates of $1.75 billion (in line)
- Adjusted EPS: $0.99 vs analyst estimates of $0.97 (2.4% beat)
- Adjusted Operating Income: $496.5 million vs analyst estimates of $483.4 million (2.7% beat)
- Revenue Guidance for Q4 CY2024 is $1.76 billion at the midpoint, below analyst estimates of $1.78 billion
- Adjusted EPS guidance for Q4 CY2024 is $0.98 at the midpoint, below analyst estimates of $1.00
- Gross Margin (GAAP): 45.4%, down from 47.3% in the same quarter last year
- Inventory Days Outstanding: 212, in line with the previous quarter
- Operating Margin: 25.3%, down from 31.5% in the same quarter last year
- Free Cash Flow Margin: 16.7%, up from 6.1% in the same quarter last year
- Market Capitalization: $30.52 billion
“With third-quarter results above expectations, we remain focused on delivering consistent results in the current environment through execution and prudent financial management,” said Hassane El-Khoury, president and CEO, onsemi.
Company Overview
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
A company’s long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Regrettably, ON Semiconductor’s sales grew at a tepid 5.6% compounded annual growth rate over the last five years. This shows it failed to expand in any major way, a rough starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
Long-term growth is the most important, but recency is neccessary for semiconductors because of Moore's Law, which suggests the pace of technological innovation is so high that yesterday's hit new product could be obsolete today. ON Semiconductor’s history shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 4.4% annually. 
This quarter, ON Semiconductor reported a rather uninspiring 19.2% year-on-year revenue decline to $1.76 billion of revenue, in line with Wall Street’s estimates. Management is currently guiding for a 12.8% year-on-year decline next quarter.
Looking further ahead, sell-side analysts expect revenue to remain flat over the next 12 months. While this projection indicates the market thinks its newer products and services will fuel better performance, it is still below the sector average.
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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 212, which is 65 days above its five-year average. These numbers suggest that despite the recent decrease, the company’s inventory levels are higher than what we’ve seen in the past.
Key Takeaways from ON Semiconductor’s Q3 Results
It was good to see ON Semiconductor beat analysts’ operating income and EPS expectations this quarter despite a roughly in line revenue print. On the other hand, its revenue and EPS guidance for next quarter missed analysts’ expectations. Overall, this was a mixed quarter. The stock traded up 1.1% to $72 immediately following the results.
Is ON Semiconductor an attractive investment opportunity at the current price?We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
