ON shares under pressure as inventory levels rise
2min read ON Semiconductor (ON) reported third-quarter results that showed mixed performance against analyst expectations, with revenue of $1.76 billion in line with estimates but reflecting a steep 19% year-over-year decline. Adjusted earnings per share (EPS) came in at $0.99, beating estimates of $0.97, yet significantly lower than last year’s EPS of $1.39. This decline in key metrics was largely influenced by ongoing demand headwinds across major segments, especially in Power Solutions, where revenue fell 33% year-over-year. Despite a modest revenue beat, guidance for the upcoming quarter was cautious, with revenue projections of $1.71 billion to $1.81 billion at the midpoint, slightly below Wall Street’s expectations.
ON shares were challenging the 200-day MA ($72.64) ahead of the report. The stock is challenging support at the low end of its recent trading range ($66).
Key metrics for Q3 revealed some bright spots. The Intelligent Sensing Group reported revenue of $278.8 million, which exceeded expectations of $260.1 million but was still down 15% from the previous year. Gross margin, a critical metric for the company, stood at 45.5%, marginally beating the 45.4% estimate but down from 47.3% in the previous year. The adjusted operating margin also came in at 28.2%, above expectations of 27.7%, though this was still a significant decline from 32.6% last year. Operating income of $496.5 million exceeded analyst estimates of $483.4 million, demonstrating ON’s efforts to maintain profitability amidst declining sales.
Several factors drove ON’s performance this quarter. The decline in Power Solutions revenue, one of ON’s primary segments, heavily impacted overall revenue, reflecting slower demand in the automotive and industrial markets. Despite this, the company continued to make gains in the Intelligent Sensing segment, supported by its focus on AI data centers and automotive imaging applications. Additionally, disciplined cost control measures contributed to the stronger-than-expected adjusted EPS and operating income, signaling effective financial management in a challenging market.
Inventory levels remain a concern, with ON reporting 212 inventory days outstanding, consistent with the prior quarter but notably higher than its five-year average. This elevated inventory could reflect weaker demand and challenges in aligning supply with the current market conditions. Despite the headwinds, ON’s free cash flow margin improved significantly to 16.7%, up from 6.1% in the previous year, suggesting better cash management and cost efficiencies.
Looking ahead, ON Semiconductor’s guidance for the fourth quarter reflects continued caution. The company anticipates adjusted EPS in the range of $0.92 to $1.04, with the midpoint falling below analyst expectations of $1.00. Likewise, revenue guidance of $1.71 billion to $1.81 billion, while within range, leans toward the lower end of estimates. The projected gross margin of 44% to 46% aligns with estimates but reflects a contraction compared to prior quarters, underscoring the ongoing pricing and demand pressures in the semiconductor industry.
CEO Hassane El-Khoury emphasized the company’s focus on capturing opportunities within the power spectrum, particularly in the automotive and industrial sectors, as power demands continue to increase. He highlighted ON’s strategic investment in growth areas such as AI data centers, automotive, and industrial applications, which the company believes will drive future market share gains. Despite near-term challenges, ON remains committed to executing its strategy through cost discipline and targeted investment.
Overall, ON’s Q3 results reflect a challenging but resilient quarter, as the company managed to surpass EPS and operating income expectations despite a significant drop in revenue and mixed segment performance. While investors reacted cautiously to the Q4 guidance, sending the stock up 1.1% post-earnings, the broader outlook remains clouded by demand uncertainties, especially in automotive and industrial markets. As ON navigates these headwinds, its emphasis on prudent financial management and strategic positioning in growth segments remains a crucial aspect of its long-term outlook.
