ON Semiconductor Corporation ON delivered first-quarter 2018 non-GAAP earnings of 40 cents per share that beat the Zacks Consensus Estimate by a penny. Earnings increased 48% year over year and 3% sequentially.

The company delivered revenues of $1.38 billion, which increased 7% year over year from the year-ago quarter’s level of $1.28 billion and surpassed the Zacks Consensus Estimate of $1.36 billion. The figure was also toward the upper end of management’s guided range of $1.34-$1.39 billion.

Notably, year ago figure excludes a one-time impact of $155 million due to a change in revenue recognition model to the “sell-in” method from the “sell-through” method. Moreover, sequentially revenues were flat.

Robust demand, adoption and favorable product mix of the company’s diversified product portfolio drove year-over-year growth. The company continues to gain from its strength in automotive and industrial end-markets.

Revenue Details

Business Units Metrics:

ON Semiconductor has three business units namely — Power Solutions Group or PSG (revenues of $693 million), Analog Solutions (revenues of $496 million) and Image Sensor Group (revenues of $189 million).

End-Market Metrics:

Automotive (32% of revenues) end-market revenues were approximately $445.3 million, up 8% year over year. In the 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.

The company boasts of competitive edge over its peers in 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.

Industrial (26%) end-market revenues increased 11% year over year to $361.5 million. Solid demand of Python line of products aided growth. Demand in industrial end-markets was further driven by power modules, image sensors, machine vision as well as favorable macroeconomic conditions.

The addition of Fairchild’s offerings to its product portfolio has made it lucrative. Moreover, the company is in the process of launching a new platform of products providing higher efficiency to access a wider range of the industrial markets.

Communications (17%) end-market revenues dipped 3% year over year to $239.8 million. The decline was mainly due to a slowdown witnessed in smart-phone market, which was partially mitigated by the company’s penetration in key global markets. New platforms as well as increased adoption of its content on major platforms aided ON Semiconductor to minimize the impact of the decline.

Computing (11%) grew 20% year over year to $149.4 million, thanks to the ramp in cloud and server solutions segments and a favorable client PC market.

Consumer (13%) end-market revenues grew 7% on a year-over-year basis to $181.5 million.

Operating Details

Non-GAAP gross margin was 37.6%, up 10 basis points (bps) sequentially and 220 bps on a year-over-year basis backed by improvement in operational efficiency. Moreover, strengthened product mix reflected improved contribution from the higher-margined industrial, server and automotive segments. Management expects mix improvement, portfolio optimization and manufacturing synergies from the acquisition of Fairchild to further drive margins.

Non-GAAP operating margin was 15.7%, reflecting a year-over-year and sequential increase of 250 bps and 40 bps, respectively.

ON Semiconductor Corporation Price, Consensus and EPS Surprise

ON Semiconductor Corporation Price, Consensus and EPS Surprise | ON Semiconductor Corporation Quote

Balance Sheet

Cash & cash equivalents were $924.9 million, down from $949.2 million in the previous quarter.

In the first quarter, the company generated operating and free cash flow of $226.5 million and $127.0 million, respectively.

Guidance

For the second quarter of 2018, ON Semiconductor forecasts revenues to be in the range of $1.405-$1.455 billion (mid-point $1.43 billion), given its booking trends, estimated turn level and backlog level. The Zacks Consensus Estimate for the quarter is pegged at $1.42 billion.

Automotive revenues are anticipated to remain strong backed by the impressive demand witnessed by image sensors for ADAS applications, and IGBTs for electric vehicle traction motors in China.

Furthermore, management anticipates silicon carbide (SiC) developments to generate revenues from second half of 2018 in the automotive end-market. Ramp of design wins led to impressive growth in LED lighting business, consequently bolstering the prospects of automotive lighting.

Industrial end-market revenues are expected to grow sequentially. Management anticipates energy-efficient power modules to be a key catalyst in the long term for industrial end-market.

Management projects low demand in Communications end market to keep revenues relatively flat or witness a decline on a quarter-over-quarter basis.

Revenues for computing end-market are projected to increase sequentially owing to a rise in seasonal demand and continued ramp in server business.

Management expects Server business to significantly contribute to computing end market in 2018. ON Semiconductor is engaging important cloud and server companies, and working on next generation platforms for leading CPU providers.

However, revenues in consumer end-market are anticipated to remain flat sequentially.

Non-GAAP gross margin is projected to be in the range of approximately 37-39%.

Non-GAAP operating expenses are expected in the range of $305-$319 million. The company revealed that the sequential increase is attributed to seasonality of stock-based compensation grant.

For full year 2018, management targets free cash flow generation of $800 million. It continues to expect margin expansion as well as free cash flow growth throughout 2018 driven by synergies from Fairchild acquisition and better product mix.

Conclusion

ON Semiconductor anticipates long-term growth backed by robust demand for products in the automotive and industrial end markets. Specifically, power management and imaging products which are gaining traction remain a key catalyst.

Moreover, integration and optimization of Fairchild’s manufacturing operations is anticipated to boost the company’s profitability.

The company is already enjoying cross-selling opportunities to a combined customer base that is aiding its top-line. Management also remains elated on improved customer engagement leading to long term supply agreements. We believe these factors will help this Zacks Rank #2 (Buy) stock to improve its performance going forward.

Additionally, ON Semiconductor is likely to gain a competitive edge through increased investment in captive raw wafer manufacturing.  Rising raw wafer prices will boost company’s margins in the long-run.

Other Stocks to Consider

Some other top-ranked stocks in the broader technology sector are Seagate Technology PLC STX, Mellanox Technologies, Ltd. MLNX and Micron Technology, Inc. MU, each sporting a Zacks Rank #1(Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Seagate, Mellanox and Micron have a long-term expected earnings growth rate of 15.6%, 15% and 10%, respectively.

Wall Street’s Next Amazon

Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.

Click for details >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Seagate Technology PLC (STX): Free Stock Analysis Report
 
Mellanox Technologies, Ltd. (MLNX): Free Stock Analysis Report
 
ON Semiconductor Corporation (ON): Free Stock Analysis Report
 
Micron Technology, Inc. (MU): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research