On Monday morning, On Semiconductor (ON) released the firm's fourth quarter financial results.
For the three month period ended December 31st, the firm posted GAAP EPS of $1.35 (adjusted EPS of $1.32) on revenue of $2.104B. The firm beat Wall Street's expectations for both the top and bottom lines, while the revenue print was good for year over year growth of 13.5%. The firm did adjust for the $64.9M divestiture of a business as well as for actuarial gains associated with pension plans and on the negative side, for certain income taxes totaling a net $0.03 per share.
The firm's cost of revenue increased 6.8% to $1.083B, resulting in gross profit of $1.021B (+22.7%) on a gross margin that improved from 45.1% a year ago to 48.5%. Operating expenses actually decreased 10.2% to $316.2M, which drove operating income a whopping 46.6% higher to $704.3M. after accounting for items such as interest expense, gains on divestitures and taxes, net income landed at $604.3M (+41.7%).
Segment Performance
PSG (Power Solutions Group) This segment offers discrete module and semiconductor products that perform application functions including power switching, conversion, signaling, and circuit protection. This group drove revenue of $1.048B, up 10% year over year.
ASG (Advanced Solutions Group) This segment designs and develops analog, mixed signal and advanced logic, Wi-Fi and power solutions for the automotive industry, as well as for consumers, and industrial clientele to include the medical and aerospace/defense industries. This group drove revenue of $701M, up 8% year over year.
ISG (Intelligent Sensing Group) This segment designs and develops image sensors, single photon detectors, as well as actuator drivers for autofocus, and image stabilization. This unit serves the automotive, industrial, consumer, wireless, medical and defense industries. This group drove revenue of $354.2M, up 44% year over year.
Guidance
For the current quarter, onsemi - as the firm is now known - sees revenue landing in a range spanning from $1.187B to $1.97B, which is being seen as mildly disappointing. The midpoint here would represent a year over year contraction of 1.5% and the top end of the range is below the $1.99B that Wall Street was looking for.
The firm also sees gross margin of 45.6% to 47.6% for the quarter and operating expenses of $316M to $331 that would include $18M worth of special items. That would place adjusted EPS at $1.02 to $1.14, or GAAP EPS at $0.99 to $1.11. Wall Street was looking for adjusted EPS guidance up and around $1.14, so that being the high end of guidance is also disappointing.
Perhaps this guidance had a little something to do with the announcement that the firm's Board of Directors had authorized a new common share repurchase program of up to $3B through December 31st, 2025.
Fundies
For the quarter, onsemi drove operating cash flow of $731.3M (+16.7), as the purchase of property, plant and equipment increased 101.7% to $342M. That put free cash flow at $389.3M (-14.8%).
Turning to the balance sheet, ON ended the quarter with a net cash position of $2.919B and inventories of $1.617B, putting current assets at $5.729B. All of these numbers are up over the past year, the cash number the most significantly so. Current liabilities add up to $2.061B, putting the firm's current ratio at a very healthy looking 2.78. Even sans inventories, the firm ended the quarter with a beastly quick ratio of 2.0.
Total assets amount to $11.979B, including $1,938B in "goodwill" and other intangibles. At 16.2% of total assets, I do not see this as a problem. Total liabilities less equity comes to $5.772B including $3.046B in long-term debt. The firm could very nearly pay off this entire debt-load out of pocket if need be. This is one solid balance sheet.
My Views
I have been very selective in my selections within the semiconductor space so far this year. I have stuck with the highest end products, focusing on artificial intelligence and the data center. That means that I am in Nvidia (NVDA) and Advanced Micro Devices (AMD) and nothing else. I had been in Marvell Technology (MRVL) back in mid-2022. That one did not work out as planned though I did at least miss out on most of that pain.
I like On. I like the diversification across a number of industries that almost touches everything that I do not touch with my today elitist allocation. The firm does have some elevated inventories, but not like one sees elsewhere. They're not in memory which is probably going to be the toughest place to be.
The stock trades at 15 times forward looking earnings, and does consistently drive cash flow, so the argument can be made that the stock is on the inexpensive side even if they have brought down expectations. The balance sheet is close to solid gold.
Readers will note that last week ON had broken out from a long flat basing period of consolidation with a $77 pivot. As that occurred, the stock entered into technically overbought territory as far as both the Relative Strength Index (RSI) and the daily Moving Average Convergence Divergence (MACD) are concerned. The stock has already tested pivot on the opening bell. Should that low hold throughout the session, I do think that ON is investable.
What I will wait to see just what happens and not rush into this decision is this: Should pivot fail today or early this week, and there is a selloff, it becomes likely that the stock adds a handle. That would turn the long flat base into a short flat base with a cup pattern that encompasses December and January. That happens and the interested investor will be better able to time his or her entry.
I would much prefer to see if there is a chance to grab a few shares at the 21 day EMA or 50 day simple moving average (SMA) than to rush right in and buy the shares of a company that just guided Wall Street below their expectations. Investors can still go out to St. Patrick's Day and get paid more than $2 for March 17th $75 puts or more than $1 for $70 puts with the same expiration date. Just food for thought.
